Government in the Free Market

Public or Private Ownership

The Free Market is also known as Capitalism

• http://www.youtube.com/watch?v=BZV-Eiw_pGs

Minnesota Department of Education Social Studies Standards (2004) include in the high

school economics standards (page 59)…

• “The student will understand the basic characteristics of markets and the role of prices in modern market economies.” (Standard IV, A)

• “The student will understand the economic role of government in a free market economy.”

The Free Enterprise or Market System has basic characteristics:

• Free enterprise system, Free Market System or Capitalism all require…• an economic system based on

private ownership of productive resources

The Free Enterprise or Market System has basic characteristics:

• “Private” means that individual citizens are the owners of the means of production-the land, labor and capital.

• And…individuals are the Entrepreneurs.

The Free Enterprise or Market System has basic characteristics:

• Open Opportunity to enter the market– Producers are free to produce the goods and

services consumers want– Consumers are free to decide how to best meet

their needs and wants• Legal Equality– Everyone has the same economic rights

• Free Contract– People decide which legal agreements to enter

into

The Free Enterprise or Market System has basic characteristics:

• The desire for profit drives producers to supply goods and services to the market

• The desire for consumer satisfaction drives consumers to purchase products in the market.

The Minnesota “Standards” also include

• The student will understand the economic role of government in a free market economy.

• “1. Students will identify that one important role for government in the economy is to secure and enforce property rights.”

The “standards” include examples…

• Examples: 1. Protection from trespassers and thieves, protection from foreign invaders, enforcement of legal contracts

We will focus on the second part of this standard:

• 2. “Students will identify and explain public goods.”

• It will be our objective to distinguish between private goods (owned by individuals) and public goods (owned by government) using some basic economic principles.

Some goods are “free goods”…

• Free goods are so abundant, anyone can have them. Sunshine? Weeds? Air?

• Free goods provide a special challenge for economic analysis.

• Most goods in our economy are allocated in markets and have ownership and a price.

• Free goods do not.

Free goods…

• When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in the proper amounts.

• In such cases, government policy can potentially remedy the market failure that results, and raise economic well-being.

The Internet is a special example of this…

• At least one writer has called the Internet

The High Tech Gift Economy

• Why does Barbrook call it that?• Because many early (and current) web

designers and programmers believed that the “open source” software and information was to be shared with little or no charge to users.

• This is a most idealistic idea, but…

SOPA and PIPA

• It is the root of the current debate over the “Stop Online Piracy Act”– SOPA and

• “Protect Intellectual Property Act”- PIPA• These are the Congressional Bills that were

being protested yesterday on Google and Wikipedia, to name two of many sites.

Other than the Internet, which is a special case,

• When thinking about the various goods in the economy, it is useful to group them according to two characteristics:– Is the good excludable?– Is the good rival?

Excludability and Rivalry:

• Excludability– Excludability refers to the property of a good

whereby a person can be prevented from using it.• Rivalry– Rivalry refers to the property of a good whereby

one person’s use diminishes other people’s

• Private Goods–Are both excludable and rival.

• Public Goods–Are neither excludable nor rival.

• There are also “common resources” and natural monopolies, but we aren’t going to focus on those.

The Free Rider problem

• A free-rider is a person who receives the benefit of a good but avoids paying for it.

• Since people cannot be excluded from enjoying the benefits of a public good, individuals may withhold paying for the good hoping that others will pay for it.

• The free-rider problem prevents private markets from supplying public goods.

People can watch fireworks…

• …without paying to watch them.• Can’t stop ‘em.• Thus…free riders

• Solving the Free-Rider Problem– The government can decide to provide the public

good if the total benefits exceed the costs.– The government can make everyone better off by

providing the public good and paying for it with tax revenue.

• National Defense• Basic Research• Fighting Poverty• Others?

A Lighthouse is the classic example

Since ships can see the light without paying a fee…

• No one ship owner will build a lighthouse because of the Free Rider Effect.

AND…The lighthouse light is:Non-Excludable – Can’t stop ships from seeing light

AndNon-Rival- One ship using the light does not

affect others using it.

• The Tragedy of the Commons is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.– Common resources tend to be used excessively

when individuals are not charged for their usage. – This is similar to a negative externality.

• The Dodo Bird was a victim of this tragedy…it tasted good and could not fly.

• The market fails to allocate resources efficiently when property rights are not well-established (i.e. some item of value does not have an owner with the legal authority to control it).

Let’s think about a variation

• Why do governments provide professional sports stadiums?

• Are Pro Sports non-excludable?• Are Pro Sports non-rival?

• No to both: • Tickets exclude free riders• And there are just so many seats in a stadium

• So…Pro Sports teams and their stadiums are not true public goods.

• Why then do governments build them fairly often…or at least contribute tax money in part to build stadiums?

• Come up with 3 reasons why this happens.

Please Read the following

• Find 3 arguments PRO and 3 arguments AGAINST having the taxpayers pay for all or part of a new Vikings stadium. (Note: Your personal opinion of the Vikings is not an argument item.)

• http://www.minnpost.com/lizfedor/