Chapter 3 Vocab

Government Intervention in Market Failure

When market failures occur, the government must step in a provide the goods that are under-produced or impose government regulations to ensure the goods that are over-produced are not produced or the amount that is produced is reduced.

modified free enterprise economy

a free enterprise economic system with some government protections, provisions and regulations. Government receives money (tax revenue) from households and businesses. It uses this money to buy goods and services in the product market, and to buy resources in the factor market. Government also provides goods and services to households and businesses

Quasi-Public Goods

a good or service that could be produced and delivered in such a way that exclusion would be possible. However, the benefits of these goods are beneficial to society, so they are normally provided by the government. They are paid for directly using tax revenues or producers and/or consumers are given subsidies to purchase these goods.

subsidy

a government payment that helps cover the cost of a good that benefits the public as a whole.

Circular Flow Model

Consumers and producers (including the government) determine the flow of money and resources in a free enterprise economy.

Milton Friedman

Friedman believed that markets should be free to operate without government intervention. Monetarism—the theory that government can stabilize the economy through controlling the money supply.

Government Intervention solution for Free Riders

Government usually solves the problem of a free rider by providing that good and paying for with tax revenues.

Legal Rights that Protect the Free Enterprise System

Open Opportunity Legal Equality Free Contract

Roles of Producers and Consumers in a Free Enterprise System

Producers: charge the highest price consumers are willing to pay. Consumers: choose to buy a good, thus "voting" on what goods they prefer. Government: plays an important, but limited role in a capitalist economy. This is why most countries have a mixed economy or a modified free enterprise economy.

Public Transfer Payments

The programs designed to protect individuals from economic hardships is referred to as the country's safety net.

Free enterprise system

another name for capitalism, an economic system based on private ownership of the factors of production. This means anyone is free to start a business.

3 Freedoms in Free Enterprise Systems

Individuals have the freedom to start or engage in a business. Workers voluntarily decide to work for a particular company. Consumers freely decide which products to buy.

Positive Externality

exists when people benefit from the consumption of a good, but they did not pay for the costs of the good. Example: flu vaccine

Negative Externality

exists when the producers of a good do not have to pay for the full cost of production. Example: water pollution by a factory

Public Goods

is a good or service that is provided by the government as a result of a market failure

Government Intervention in Free Enterprise System

the government ideally places few limitations on businesses. Government intervention should: Promote the competition. Protect consumers.

Characteristics of a Public Good

Non-rivalry: one person's consumption of a good does not prohibit another person's consumption of the good. Non-excludability: there is no effective way of excluding individuals from consuming a good for not paying for it.

Free Rider Problem

The characteristics of a public good creates a free rider problem, which means that it is impossible to exclude someone from receiving a good even when they refuse to pay for it.

public transfer payment

a payment in which the government transfers income from taxpayers to recipients who do not provide anything in return.

Legal Equality

a situation in which everyone has the same economic rights under the law. Some people should not have a better chance than others to succeed.

Free Contract

a situation in which people decide which legal agreements to enter into. Everyone should have the right to decide for themselves which legal agreements they want to enter into.

Market Failure

occurs when a free enterprise system fails to produce the right mix of goods desired by society.

Externalities

occurs when some of the costs or the benefits of a good are passed onto someone other than the immediate buyer or seller.

Open Opportunity

the ability of everyone to take part in the market through free choice. This ensures that markets will consist of many goods and services. This concept provides an incentive for everyone to be productive and efficient.