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PRENTICE HALL ECONOMICS Pays (Uo S UN /IN) STEVEN MUSHEEERIN PRENTICE HALL Ete Ay. Be iort i Arthur O'Sullivan « Steven M. Sheffrin About the Authors Arthur O'Sullivan, Ph.D Arthur O'Sullivan is a profesor of economics at Lewis and Clark College in Portland, Oregon. After rccving his BS. degree in economics at the University of ‘Oregon he spent two years in che Peace Corps, working with city planners in the Philippines, He recived his Pi.D, degree in economics fom Princeton University in 1981 and has taught at the University of California, Davis, and Oregon State University. He recently sccepted an endowed profeswrship at Lewis and Clark allege, where he teaches microeconomics and urban Steven M. Sheffrin, Ph.D Steven M. Shetfrin is dean of the division of social sciences and professor of economics at che University ff California, Davis, He received his B.A. from Wesleyan University and Ph.D. in economics from the Massichusets Institute of Technology. He has been visiting professor at Princeton University, Oxford Universi, and the London School of Economics and served as financial economist with the Office of Tax Analysis oF the United States Department of the “Treasury: Professor Shettin sche author of nomerous bbooks and articles in the fells of macroeconomics, public fnanee, and international economics ‘The Wall Stret Journal Classroom Edition is a supplemental educational program published since 1991 by Dow Jones and Compan, publisher of ‘The Wall Street Journal, The program is designed to improve the economic and business literacy of America’s secondary-school students. The centerpiece of the rogram sa full-color student newspaper, published monthly from September to May. Regular features focus on busines, economies, careers, entrepreneurship, rechnology, personal finance, and global interdependence. Anticles are drawn dleitly from the pages ofthe daily Wall Stree Journal ‘THE WALL STREET JOURNAL. xi SSS aed i raed eed faci: Ta pico pee by inp ad emi eal ‘Sse phere pean am soya annonce Fran mantcrom chomping deporte Frosting pesca ee and Remorse ewe Poe Hans ena of Rao Eat I Kerosene valent fama Panes en eee ee eeraceeeen Fastener of eer ca fer Hall saosin Cy UN AULAU a ES ‘Academic Consultants Jean Caldwell, Professor Emeritus Department of Fsonomics University of Central Oklahoma Edmond, Oklahoma Adhip Chaudhuri Deparment of Economies Georgetown Univesity ‘Washington, D.C, W. Michael Cox. Senior Vice President and (Chief Economist Federal Reserve Bank of Dallas Dallas, Texas Suzanne Allen Gulledge ‘Associate Director ‘School of Education University of North Carolina ‘Chapel Hl, North Carolina Douglas Kinnear Department of Economics Colorada State University Fort Collins, Colorado Bonnie’T. Meszaros Center for Economic Education ‘and Entrepreneurship University of Delaware "Newark, Delaware avid Ramsour President, Texas Council on Economie Education Houston, Texas Robert Smith Director of Special Projects ‘Texas Council on Economic Faueation Houston, Texas Patricia D. Taylor Senior Inszuctor Colorade State University Fort Collins, Colorado Teacher Reviewers John Beacom Redwood High School Visalia, California Linda Tate Hudson CCenteal High School Magnet Career Academy lle, Kentucky Dan Richardson East Troy Community Schools East Troy, Wisconsin Stuart Rabin Bellmore-Mesrick C.HS.D. Bellmore, New York Denny Schillings Homewood Flossmoor High Schoo! Flossmoos Iinois Content Area Reading Specialist De Lois E. Huffman North Carolina Stare Univesity Raleigh, North Carolina Block Scheduling Consultants, jaron Dragon Nimiez High School Houston, Texas Barbara Slater Steen Assstane Professor James Madison Univesity Harrisonburg, Viginia Internet Reviewer Vincent M. Seeley Geceaville High School Greenville, New York Personal Finance Handbook Revis Rosella Bannister JumpStart Coalition foe Personal Financial Literacy ‘Washington, D.C. John B. Clove, Professor Emeritus Economies and Business Dept Stace University of New York at Oneonta Onconta, New York Curriculum and ‘Assessment Specialist Jan Moberley Dallas, Texas Program Advisors Michal Howden Social Studies Consultant Zionsville, Indiana Joe Wieczorek ‘Social Studies Consultant Baltimore, Maryland Unit 1 Introduction to Economics. © whats Econom 2 onan Coe — cooper arse — Chapt Chapter @) Economic Systems. ‘esieingte Tre Ezononie Gare 2 Trefre Mae, a 3 Cental Planned Ecnonies tase Sua Masi Oss a 4 oder Econom. a ‘Chap Assessment Chapter @) American Free Enterpri Bente offre enters 2 Pramotng Gow od Stab 13 Providing Pic Gane. ae 4 Providing Satay Net ‘Caan Study: Govorament nde inrsate Highway Sytem. Chapter 3 Assssnent TRUS Deanne Conse Isus: Heal Cot Introducing Microeconomics: Unit 2 How Markets Work. Chapter @) Demand. ® Undersancing Demand 2 Shite oft Domand Ci veneer 3 Easy of Donan ‘eae Suay Ihe Matos «Person an Enraprneur?. cooperate chapter © Supph Unda Soy ane Sy Ave Basel Poers Pi To Mh? Choptr 5 Asessnet » gal Unit 3 Prices. 1 Combining Supp and Demand 1 2 Changes in Marke Euitrium 13 3 Tho ae of Prices. 198 ase Stuy Government and the Marka for Mile 1s Chapter 6 Assessment. Market Structures. . 1 Perfect Carpettion 2 Monopoy '3 Monopole Compeition end inal, 4 Rogultion and Doroguianan (Case Study: Regulating Coble Television. — Chapter 7 Assessment a TERY SEER (i su Energy Dependence 0 Business and Labor. Business Orgar 1 Sole Proprietoships 2 Parmareioe 13 Corporations, Merges, ad Mulinationas 196 4 omer Organizations. 2 (ose Study Business 60d Eien 26 Chapter Assessment. 26 Labor. 1 Labor Markt Tends 2 Lar and wages 28 3 Organized Later = Sieg za Case Study The Patorzon Sik Sire of 13 za Chapter Assessment 7 Meu aN Minimum Wage 8 Unit 4 Money, Ban! Chaner @ Mone and enki. tre 13 Banking Today a 258 (ese Study Big Banks and Smal. aaa 8 Chapter 10 Assessmont a 266 ‘ENULSTETLIBNY. gear Gunner sss ogotaing Fncil Marka. 208 Financial Markets. Saung and investing 2 Bonds and Other Financial hess m 13 The Stock Make. as ese Stay The Foe of he Dot Come 0 (haptor 1 Asse65MON nen Introducing Macroeconomics: Unit 5 Measuring Economic Performance...298 2 Buses Cres 10 23 Economie Grown 38 ‘ose Study Hon Has Technology Acted Paducwniy 8 Chopter 12 Assessment — ‘8 Chapter @ Economic Challenges. Unemployment. 2 elstion 3 Povey {eae Sway. Unemplommentn» Changing Economy — a ‘hope 18 Assessment 32 "MRRUSERURISY enews Come ies Fasy re cs 288 Unit 6 Government and the Economy .. Chapter @ nes and Government Spending. 2 feel tela ws ad Sd ms i ba eae caper avormen Chapter @ Fiscal Policy. . @: ‘Uncerstanding Racal Polley | 2 Fiscal Poly Optons. 8 13 Busgac Daf and tre Neonal abt a {aso Study: Ii Sci Seeuriy Sunuive? on ag Chapter 15 Assess en conned ‘URQSILEP Desarne Conor Issues: Iiteme 09 nnn cnn 2 Chapter @ The Federal Reserve and Monetary Pal {efoto a 3 honey Pee Tens 4 Monetary Paley ond Macroccanonie Stbiation know that we can ge mk and if people prefer to buy Dx. Knowing the bread eer ewe go tothe procery sore, best way to produce a product cus waste, or char the gos pumps willbe ll when we too, Of courses in the en prodhxt edo cvs goods is ficient is ay ed tle aba ke delves goods nef Title dann Coveest Which econo go cold fapen wcmterhos ge wen Fret to geranertinereion nied gaan Feirtson ve ‘Stole psi inal 0h Chapter2m Section) 25 satay nt or tana ig eet ‘stosonome rsp ‘ets an hb ‘ents onto ‘uaa of praduenon nd consumption of oad andaorsces Y Thowadiinsl economy af ‘ustomolats Ouch Maya nlades regular mare 20 to gas up our ears, We want to fee Confident that we will get our paychecks every payday. Ideally, eeonomie systems reassure people that goods and serves wll be available when they need them and that they cam count on receiving expected MWe also want the security of knowing, shar help is available if we are elderly, some other 00s, unemployed, or facin potential economic disady people fecl that the government should provide some kind of saety net, or sct of fovernment programs that protect people experiencing unfavorable economic condi- sions. These include injuries, layotts, rural disasters, or severe shortages. ‘Most countries also believe in providing some sort of base income for retired persons to ensure that older people can support themselves after retirement. mage. Most Economic Equity Each society must decide the best way to divide its economic pie. What constitutes fair share? Should everyone get the same, fr should one’s consumption depend on hhow much one produces? How much should society provide for those who are ‘unable or unwilling to produce? Many people believe in equal pay for equal work, bur society does not value all jobs equal Most lawyers eaen more than ‘most nurses, Most eompurer progeamm carn more than most track drivers. Not everyone is able vo work. How should we provide fr che ill and inte Economic Growth and Innovation A nation’s economy must grow for a nation to improve its standard of ving, 0° level of economic prosperity. This is expecially tue if a counety’s population is growing, The ceonomy also must grow to provide now jobs and income for people Tairation plays a huge roe in economic growth. Think of she changes brosght Shout by the shift from nomacism to agi culture, from the agricultural age to the industrial age, from the industrial age 10 the information age. Innovations in tech nology increase the efficiency of production and usher in new goods and services. In your lifetime, you are witnessing innova ons in computer and networking tech nology that are changing the ways people work, shop, conduct business, locate infor: ‘mation, and communicate Additional Goals Asoviery may value goal in addition ro those described above, Environmental protection, fullemployment universal medial ea ‘ther importanc concerns may bea ‘ation’ chief economic goal, All matio ccooomie goals, or arrange them in order of imporcance, No matter how a nation Prioritizes ies goals, one fact remains achieving any eeonomie goal comes only with some kind of economic trade-of must prioritize theie Economies and Values Four different economic systems have developed to address the chree key ccooomie questions. Each system reflects 2 diferent prioritization of economic goals Teale reflects the values ofthe societies in which chese systems ae present. Traditional Economies A traditional economy relies on habit, custom, or tual 1 decide what to pee, hw pce ado whom Market Economies i TO disc te There ble room or Insmmtatecmony economic decion ae | Someone innovation ot change Tho cadifonalmade’by Indus and are cd on | Maca cmon syuem revolve round the change, or wade The choices mae by | egy a wel au awa wey Game es se eae | Seer fending Toystend ore pie osce hows as wel who comes the gous | sora re ations of thee fathers, while girls follow and services produced. Market economics | ™™t* Inthe foorsteps of theie mothers are also called ce markets, oF capitalists. | eat pam ‘Traditional economics are ysualy You wall ead show the foe market in | seerony connie communities chat tend to stay relatively detail in Section 2. saan che smal and close, Often these societies work seerlomocmt to support entte groups, rather than just Command Economies ey themseives oF thei immediate fais. In a eamal planed economy, the central | cunro/gade Agpcultual and hunting practices usally goverment alone decides how to anewer | soeese lie atthe very here ofthe people ies, althreckey economic quetons. Cental | gang Ins and egous belts planned economies are sometimes called | commueeaeny Societies with eadtional economies command economies, hvcause a cental | wiehnsewe have ew mechanisin place o delle: thority fn command ofthe cconomy. | torn, tively with the effects of environmental Section 3 discusses the theories behind | command olthe Most pubic ports rely on government or suppor. Ye find tay any economic sytem that eles exclusively on centeal planning oF the individual initiative of the fe market. lst mixture of economic systems. Most contemporary mixed economies blend the tarker with government intervention, ot ‘volvement, the No single economic system has all the answers. Centrally planned economies are based onthe principles ofthe ree ymbersome, do not adequately meet consumer needs, and. limit freedom, ‘Traditional economies have litle potential for growth or change. Even market economies, with all their advantage, have certain drawbacks, The Limits of Laissez Faire Adam Smith and other eaely free market philosophers elived that, left to its oxen devices, the free marker system would provide the greatest benefit for consumers and raise the standard of living, They sorbed ithe heeds ennai thee pacer pee renner igs in the marketplace, (See che Profile of aa Adam Smith on page 3) Even Smith a Mince bes te von re — ‘certain limited degrce of government inet ‘vention in the economy. As market economies have evolved since Smich’s rime, government intervention has become greater because some needs and wants of modem society are diffcule to answer in the marketplace. How well, for ‘example, could the markerplace provide for national defense or for roads and highway systems? Some needs that markets could meet fall to governments so that all members of society can participate. Education is one ‘example. Other needs that could fall nto this category are health care and mass beter met by the open market and ethers | sez tie rhe tan ave beter me by government action, In Governments create Ins protecting. addition occ oust cake the oppor | Sonamemamerny {Thee would be il incentive wo develop Each nao decides what is willing to new products without propery rights oF give up to meet it goals. What are you | ila rope Patent laws ls that give the inventor of willing to ive up? Are you willing to pay | Upeycwneé by Teo cade AIMS Gxa Wind de engl Ta pee aay | MNT wy a certain period of time). Without laws people without jabs? To give all people an | goemmancar insisting on competion, many people fear education? To subse farm? Should the | Deore note thar some fms would dominate others in government establish jlbsatety guelines consumers any pie ‘You will reall fom your study of American history that the Sth and 4h amendments to the Constitution declare that no person may be deprived of “Life, Crees libery ot property, without due process of ? law.” The Sth Amendment ao says chat Sweden's Mixed Economy Sveéave nia exreny hve mbes ust compensation” must he paid to tesitefrte Satin papa The Suede govrmentreesrbte mere ‘owners when private propery is taken for than hao Swafens wea Hyush sec beefi params Wien chic Public use. Private property is property that aM hiserher pares are ortkedte a ane 45 ds pnt ao, ith tse quarts hi bac str paid ye goverment Swedish patents rary mera 0 Sweden oor abt per yar rseptons. yu ea ten So yur ne bacos woud be. Enpoyrs requrete ge enpeyas a mnmu oes vsesan Tha ote ‘tocebuos ist sco ght xb olay ndutiaued couty Sete pay sine prc ethargrse como profutntes, conperadw ny 32 pecut no Unite Sistas How weld ou doer ha Balancing Control and Freedom loaf seremscivlenan ia Sweden's conan? A society must assess is values and prior lize its economic goals. Some goals are Js owned by individuals or companies, not by the government or the peuple as a whole, The Framers of the Constitution censured that the United Seates government ‘would protect this fundamental right. Chapter2m Sections 41 Thi crea ow rods! shows how government picaty Interact nn honsehade and businesses nthe rakerlace ow model ins kod geonamy Product market ee eet Factor market ACircular Flow Model of a bewscholds in the factor market. For : example, the United States government Mixed Economy pays 2.8 million employees $9.7 billion To illustrate the structure of most modern year for their labor economies accurately, we need to add foweenment to our picture of the circular Government in the Product Markt flow af economic atvicy. Figure 2.4 ilus- Governments purchase goods and services ‘rates the governments role in the matket- in dhe product market. They need buildings place ina mixed cconomy: The government and office supplies, telephones, computers, ‘enter the circular flow of economic and fax machines, for example sctivity in many ways. Governments aso provide cetain goods and services through the Factor resourees Government inthe Factor Market that they combine. The federal state, and Just like businesses, the government local governments in the United Stay, for purchases land, labor, and capital from example, provide 4 milion mikes of roads, 42 Economic Systoms Transferring Money ‘As you can sce From the outer ring fof Figure 2.4, governments collect taxes trom both households and businesses Governments then transfer che money they collect to businesses and individuals for a variety of reasons ranging from worker lsabilty 0 che survival ofa industry. The greatest expenditure of the United States governments Social Security. Comparing Mixed Economies The foundation of the United States cconomy isthe fice markt, An economic system characterized by private or corpo- rate ownership of captal goods is called fre entanie n fee enterprise sem invesumenss are Jeternived in a tee marta by pevatedecsion eather han by Sate contd, Figue 2.5 below shove 4 ontnaum sarang wth no cer divisions On ove end ofthe scale the cetaly planned economy. On the oppose ed i the fee marke economy ‘Mixed Economies Where Government Intervention Dominates Reflecting an economy almost rotally dominated by the government, North Korea occupies one end of the scale rary Ceo Pe Er ory Government owns all the property and. all economic ‘ouput, Stae-owned industries proxluce 95 pereent of North Korea's goods. Almost all imports ate banned, production of goods and services by foseign companies is forbidden, InChina, where dhe economy is dominated by government, fone quarter of all enterprises are at least partly owned by individuals. China, ike many nasions that have relied heavily on conve planning in the pas, isin tanson, a period of change in which an economy moves away {rom central planning toward a market-based system. To make the transition, state fis rust be privatize, or sold oindvduals, nd then allowed to compete with one another in the marketplace, As you will read in (Chapter 18, economic transition is a dif cal, and often painful, process 14 Econor System Dominates: Arthe other end of che scale, with one of the ‘world’s feest markets, is Hong Kong. Hong Keng, once adminisered by Great Britain, is ‘now a special administrative region of China. Ie continues, a the bepinning ofthe twenty Where the Market eC emer) od on fon Jone i twosome ten horace ype copeite cance ‘ape got tctorinadbyprvte feciaon ray ‘Sow conol end feterinaina oe cemaum orange win, revcbardvicone wrsion ord cononynaves away froma contaly somes mashacbased ym witee ssn eve tatters by oa Hi een Mae Tho degre of goverment interven Economie Syst Wiis ong Kong, i the maretlace vatas song rations Chapter 2m Sections 43 ‘his busy mall 4 fas century, largely under the free economic system itenjoyed under British rule In Hong Kong, the private sector rules. ‘The government provets private property and rarely inteferes in the free market, side from establishing wage and price controls on rent and some public services. Ics highly receptive to foreign investment and imposes virtually no barriers on Key Terms and Main Ideas 1. hat sei INT) 2 Whe gaan Desa seine NT ‘4. Why are nans wt canal planned oeoramie sone tina owe seed hn thoy pina 9 | Compare the US. tee enterprise system wh ther ‘carom ston youhavervadabouin ts chap. Applying Economic Concepts ‘5, CricelTiking What benoit mightcizen of & cuzly planned economy derive ram 2 ove taward@ rmarktbase esto? [aN Economic Systems foreign rade. Banks in Hong Kong operate independently oF the government, and foreign-owned banks have neay all the some rights as domestic ones. The United States Economy ‘The United States has a fice enterprise economy. Sail, the government intervenes 0 keep ode, provide vial services, and to promote the general welfare. Some people argue for more government services, while thers say that the government already intervenes too much inthe “economy Nevertheless, the United States enjoys a high evel of economic freedom United States law protects privace propery. The marketplace operates with a low level of government regulation Foreign investment is encouraged. 50, t00, is free trade, altbough the United States docs protect some domestic indistries and does retaliate against veade restrictions imposed by other nations. The banking industey operates under relaively fest restrictions, shave few additional restrictions, In the next chaptes, you will ead in detal about the government and the free enterprise economy of che United States. foreign-owned ba {6 ys Survey newspapers and magazines ond ales dsering fein diferent economic systars Const bulatn bout ofthe conta af ‘seanamiosinFig.25 Place each arte on she appre pat ecaton on he contra, (Go @nline | brane a Viste ?HSehao con Web Code: na 1024 Skills for LIFE Building Flowcharts flowcharts a visual guido toe process that broaks the process down nto incividual steps. Arrows ofan incicato the orger and rolatonships ‘among the stops. In conamics, awcharts help people visualize the ways goods are produced, how money flows through the economy, and how lecisons can affect many people. Use the fllowing steps to analyze the ‘lowehart below, 1. Hdonity the stops ofthe process. Read! —_aftershe inerviews peopl forthe the labels in the boxes to familiarize article? (b) What are the rwo choices yourself with the process of writing for sup one ofthe proces Snaricle. (a) What does Laura do 2. Analyze the telationships among steps. A flowchart shows a series of ations and decvions a) According v0 this ee Lae panicular chart, who ean make a wpatinoald abe story toretacch decision that directly affects the flow: Scoble ‘olan snc. tb) Wihy- docs the path split into two new paths afer Laura sits the article to her editor? \ é ‘3. Predict possible future developments, New arrows and steps can be added peas apie anywhere along the flowchart, not just at the ends Picare how diferent ecisions and actions might change he look of Laura’s flowchart. (ah 4 Where else might the flowchart spit into two new paths? (b) Give aa example of & new step that could be “imei added to tare anew path, é \ Additional Practice ia nae’ nor Construct a flavichart to show the {ieitegnore sve he aie steps thatyau could take to offer 9 haw proguct fr sale in your smal 08 stor, Chapter Summary summary of che major ideas in Chapter 2 appears below. See also the Guide to the Essentials ‘of Economies, which provides addtional review an test practice of key concepts in Chapter 2 ‘Section 1 Answoring the Theo Economic Quostons (pp. 23-27) ‘The chree basic economic questions societies ask are (1) What goods and services should be produced? (Qj How should these goods and services he pro- duced? and (3) Who consumes these goods and ser- vices? An economic system is the way 2 society decides t0 answer these theee economic questions. "There are four general sypes of economic systems: ‘waditional economies, market economies, contal planned {or command) economiss, and mix ‘Section 2 The Free Marke (pp. 28-32) AA free market is 2 sf regulating economic system powered by individuals. acting in heir own ‘selnterast. na foe market economy, the factors of production are privately owned, and individuals cide how to answer the thre econontic questions. ‘Section 3 Centrally Planned Economies (p. 34-38) ‘In oeomtally planned economy the central government controls the factors of production and answers the thee basic economic questions for all of society “Two systems often mentioned when centrally planned economies are discussed are socialism and ‘commas ‘Soction | Modom Economies ip. 40-48) Most of the economic sysiems in the world today are mixed economies. These systems ute a combina bon of government involvement and feee markers “Theoughout the world there ace different levels of government intervention in mixed economies, Key Terms Match the folowing terms with the definions listed below. You will noc use al of theres. Iaiser aro | [H) privatize competition ‘socialism mixed economy seltinterest command economy 4. System thar combines the feee marker with some government intervention 2. One's on personal gain 3. The docirine that states that government generally should not intervene in the mar: Keiplace 4 System in which che central government takes all decisions on the production and ‘consumption of good and services 5. The struggle among producers for the do: lacs of consumers 6. System in shich decisions on production and consumption of goods and services are based emiely on exchange, or trade Using Graphic Organizers 7. Ona separate sheet of paper eopy the web map below showing the advantages and values of a mixed economy. Complete the web map with examples from your knowl- ‘edge or experience. ied conn @ Reviewing Main Ideas Think ofa husness in your lea are. Decide is operation in tems of facor markers and rout mares 2. Explais how a factor ely ine fan exon pol specleaon NT 10, Why ate there no ps fee market econo n the world? Compare the circular flow diagrams of a free ‘marke and a mixed economy. Desribe how they sites and why, Critical Thinking 12, Synthesizing Information Suppose that your household isis own sociery. How are the three [key economic questions answere 13, Predicting Consequences Think of three ways your life would change if the United States hogan using a pure free market system or a pure centrally planned system instead of the free enterprise system. 14, Analyzing Information Review the advantages and disadvantages of both free market economies and centrally planned economies, Assess the ‘way each system values economic freedom and scomomic equity Problem-Solving Activity 15, Suppo that you are opening new misc sore in our town, What resources would you ned fromthe factor market? What woul yu offer in the product marke? Flow woul the goverment fet your business? Eee ae Organizing Ideas Review your personal lst fof systems. Revrite your lst in two columns. In ‘one column, tise the systems that are more influ enced by central planning, Inthe other column, Uist the ones that are moce inueneed bythe fece snake, Adu o each list other systems you use on a regular bass, Skills for Life Building Floweharts Review che steps on page 453 then answer che following questions using the flowchart below. 16, What does Megan doo try to make extra money this weekend? 17. Why does the lowchar ple Megan sets tp hee stand? 18, Whar step does Megan take if the neighbor like her cookies? 19, Ifthe neighbors do no like cookies, where could ‘a sep or steps be added so Megan could succeed 2M. Organize a flowchart for yourself depicting a ‘goal that you did not achieve. (a) Take a close Took at the steps you took. (b} What errors did you make? (c) Decide which steps you can ‘change so yout can succeed in the future, otro paths after Mogan stupa tan lrg hand poet cok tbr xs Pwr om ba Progress Monitoring Online Terowperzsties wirriccacon @) Web Code:ns-1021 ‘As final rovit tao th Economies Chapar 2 Self Test immedit feedback on you ensers. The 32 muile-choie questions dsiged to test yourandestnding of the ehaper coment a ey Materials: Notebook paper Box ot paper bog an exablished economic ‘economic policy decisions ‘ost people live and work within system, Sometimes govemment bring gradual shifts or changes to an established system For example, inthe United States daring the Great Depression, many new federal programs—notably Social Security—changed the role of jovernmient in the American economy. Oceasionaly a revolution overthrows an established economic system and puts in place a new one, a8 you ead in Chapeer 2 ‘What if you could design an eco omic system from seratch? Suppose that you are pact ofa group of people who have inherited an uninhabited Islnd As the first settlers on this island, one of your tasks will be 1 escablish an Preparing the Simulation inthis simulation, your group wil ply the role of anisindsirst seers. Your 0a isto plan an acanamiesytom. Each group has members who represent ihe ‘major sconomicsystams—tree market and cena panned economies. As the founders ef sew community, you nay choose eer af those systems or you may {ake eloments om diferent syst and create anawone Step The teacher or several student vl- untoers should prepare one slip of paper far each studantin the clas, a¢ follows: ‘One half lebeied "Free Market Economy (Capitalist, Democratic)” ‘One half labeled “Centrally Planned Economy (Socialist, Authoritarian ‘Step 2: Place the sips ina box or paper bag. Form groups a sixto eight people, ‘AM sowce ich posta etry be ‘eis bye poverty pte compare ‘presenting Istond A, Island 8, Island C, ‘and so on, When the groups are sot, each ‘member should draw one ofthe labeled slips of paper, which wil determine the economic system that member argues for inthe discussion. ‘aware that the groups wil probably not be evenly blanced between bath econ ‘mis. any group has roprsontativs of only one syste, redo the crewing.) ‘Step 2: Review the basics ofthe economic system that you represent You willbe ‘advocating this systom, so play your rola as ifthis isthe system you orevrup in end are ‘most familar with, Conducting the Simulation ‘Ths simulation wil consis of four phases. Eech group wilde and discuss ts opions reach an agree- ‘mont and presents plan tothe clas. Presentation of Options: Within your group, determine the options for yur island economy, Delegates for leach af the econaie systems represents inthe ‘toup shoud preson th Benefits ofthe systms in 9 persuasive mann Discusion: tar the benoit of bath systms have been expsined ach group should debate the bene fs and drawbacks of each economic ston. You may want to make a decision-making gi to see the trades "Negotiation: Then your group should decide whether you wish to accupt one of tho systoms as a whole ar ‘Create a new system using elements of both systems. | Avie ceces hw resources ibe located? — | tive ounethe actors produto? €]Who setemines what gots ant eevees wit te | brodeet? {ho ctemines pies? row income dub? Mt members conte equny? | ‘g) What social benefits does the system supply? I hts terol of goverment exrany? | Creat ehorike te one ons poge to ummarae the suctue ef your island’ economy | Clas Presennin: Each roup shoud choowes | Sneaker ta present the sytem the oe. Ae esoh | brosetaton, clas members may ask questions abot | the system sath spotesperson shoul erat defen te gous doions [Siutaon Anas | | I | ‘er tng to such pro's sper | sent the grows conclusions, answer } thefellwing questions: | 1. Di te systems your class cresod | Closely reseble th syst of ay | spect counuoa? so, which ones? | 2. How uchiha oes fg. | | I | } | bor influence the econo decisions youmade? ‘3. What was the most problematic issue for oach group? 4 Making Comparisons How does living ina free market economy affect your viow of anothor economic syst? i 49 bee LE Objectives ‘After studying thie section you will be abl: 1. Describe the tration oftee enterprise in ‘the United States andthe consttutonal protections that under 2 Explain the basic principles ofthe US. fee enterprise eytom, 3 Monty vo role of tho consume intho US, frocantorpise system. 4. Describe the ole ofthe government inthe US free enterprise system. ‘ome of the most famous Americans have not been politicians, sports Figures, or actors. Do you recognize names Tike John D. Rocketeller, founder of Standard Oil of New Jersey, or Andress Camegic, who started Camegie.Sceel Company, of Bill Gates, the founder of Microsoft? Each of these people started with an idea and through persistence, vision, and effort buil that wea into a huge business success, They made themselves ino the richest poople of chei tine, helped fuel the economy, and contributed vast sums of money t0 programs and charities for the public ood. A Tradition of Free Enterprise “Today there ace over 18 milion unincompo: rated businesses in America, including bout 3 million minority-owned bust nesses. Many of these were started by a single entrepreneur or 2 small group of friends or family members hoping to earn a living and, perhaps, become successful or even wealthy For centuries, people have considered America to hea “and of apporcunicy™—a place where anyone from any background sould achieve socess through haed work, Benefits of Free Enterprise Section Focus Key Terms American free enterprise is based on prait mative ‘the principles of rot mative, ‘open opportunity voluntary exchange private property rights, competion, end freecom for producers and consumers. The US. voluntary exchange Constitution suppons he fee ‘competition onterprise sytem by guaranteeing imerost group priate property ight the ight to publi disclosure laws make contacts, and tteedom fom public interest tnfir taxation, Although inumigrants no longer expect to Find streets paved with gold, this country «does offer special opportunities that have allowed business people to be so successful and have contributed to our ‘overall economic prosper. ‘Why has America heen such an economic success? Certainly the open land, narueal resources, and unintecupted low of ina grants with different backgrounds and ‘experiences all contribute, But «key factor has also boen che American tradition of free cnterprise—the social and politcal commitment r0 giving people the feedom 1 tow does ti photo roprsent the ‘Rnerican oe ‘ntrprise sptom? ee een ons conic Fredo ite Unto Sie ‘aaidulshve be ta coos tes Sceupaten and owas here hay ‘ann obs Businesses corte ir (wen deczons oo hori, hate Drtuee haw mucho predic, and how Ima core arte procs an anc The govern goreraly oes rier mihce arose Conpattion Prodaeue ve the ght angee i valos gah Cusinse Computing raters foe on cero rat om baer prodete The gce sur recone cies NBs 8 amie ‘Prat Propery Inia nd Biases ave hobby ‘andead ae uch reper sey ‘hon Praga onrrs ray rt thers tom using eo. Conta neni nt tesco te gto mato eh reoments brn sel oode. bocers my ate deans 60 SCcnconecemoydewitonor| ‘eb o foaf Ne ar yarelegalydng teen do othr beattor ‘ase egverimert rater fensinan mandir Saltire Conumars and Wout Exchange Concur Sndpraucos ay ey buy nb sa oad ne ‘morn cuss cf sach ‘rennges are wore. Ina ‘otuar exchange both pees etecta ei ro tho Pott Mave Anarene enterise ina occurs ug nani) eager pwerneonve Thana anoprnous aad usnesss to cop he rt of me tepriea in Amerie i founded an as eobase ur euro a we tant ko the fr gare overmment Chooee ona these fates an give an FE example rom your own daly ite. 52 American Free Enterprise and flexibility to tryout ther business ideas and compete in the markerplace Constitutional Protections The Bill of Rights ro the United States onsztuion guarantees certain individual freedoms, such as freedom of speech and freedom of religion. The Consiaaton ‘oople to engage in business activites. Property Rights “The moss important ofthese isthe constins sional recognition of property rights. In many other countries, even in modern simes the king or other ruler has had che power to take people's property for his own, tse, Early American statesmen wanted to prowet against this, so they included property asa protected righ under the ith Amendment. It sa right just as important as the other individual righs. The ith “Amendmene states that no person shall "be deprived of life, liberty oF property, Without due process of law wor shall private property be taken for public use ‘without just compensation Since the Fifth Amendment applies only to actions by the federal government, che Fourteenth Amendment, ratified in 1868, also includes a due process clause exending the same limitation to the state govern ments, These due process cl ‘he govemment fram taking property aay from an individual exeepe when ther is 3 public reason-—and even then the govern rent muse pay the person the fair value of the property that has been taken, These rights apply to corporations as well, so husinesses got the same protection from ‘zouernment seizure chat individuals enjoy uses PEVE Taxation The Constitution also contains the asic tules for dhe ways in which the government can tax individuals and businesses. Congress can only tax in the sways the Comsat allows. Article I gives Congress the power levy taxes, but Sections 2 and 9 require that dlirect taxes be apportioned according to population so that everyone will pay’ the same amount. The Sixteenth Amenlment, ratified in 1913 frst gave Congres the clear right wo ser taxes hased on income. Finally, the Constitution guarantees people and businesses the right to make Binding contracts. Article 1, Seetion 10 Drohibis the states from passing any “Law impairing the Obligation of Contracts.” This means that individuals or businesses cannot use the political process to. get fexcused from theie contracts. No legisla: ture can pass a Taw changing the terms of someone's business agreement. Basic Principles of Free Enterprise Our free enerprie saonomy has several key charctersces Thaw inlode pro nmr, pen oppoctinty, legal equality pave propery aglen fee cma, "oluntary exehange, and competion. Profit Motive ‘The American economy ress on @ recogni tion ofthe importance of che proft mtive— the fore that encourages people and orga nizations 10 impeove “their material wellbeing, Under other economic systems, the government may eontrol business ati. ites, deciding whar companies will be formed and how they will be run. Ina fee enterprise syscem, business owners and managers make these choices themselves, ‘operating in ways they believe will imavimize their profits. This appcoach forces management to exercise financial cliscipine because it makes people economi cally responsible for their own success of failure. It rewards inuovation by letting creative companies grow, and it improves productivity by allowing more efficient companies 9 make more money. Open Opportunity “The United States economy also benefits from 2 strong tradition of epen opportunity, the concept that everyone cam compete i the marketplace. We accept ‘hae differene people and Aliferent companies will have dierent economic outcomes, depending on their success i the mackerplace. Ths allows economic mobility up oF down: no mater how auch money you sar our wit, you can end. up wealthier or well your business performs, We also have a commizment ‘The Wall Street Journal poorer depending on how || assroum Etion For: Cutont Events Vist PHSehoct com Economic Rights Wb Code ee 10 legal equalty—by giving, ‘everyone the same legal rights we allow everyone to compete in the economic marketplace. Countries that restiet the legal rights of women or minor: ties lose the productive potential of lange Portion oftheir society: Legal equality max ‘irs country’ use of its human capital Another essential component of the American free entesprise system ace private propery rights the concept the people have the right and privilege so eonteol their ‘possessions as they wish, The fe enterprise system allows people to make their own decisions about ther own propery “The sight of fee comact allows people to decide what agreements they want to enter into. The right of voluntary exehange lows Pople to devide what and shen they want to buy and sel, rather chan forcing them to buy or sll ar particular times or at specie ves. Beeause of all these rights, we have extensive competition, the rivalry among telers to atract customers while lowering «costs, Competition provides coasunsrs with the choice ofa larger variery of goods, most, ‘of which are sold at reasonable prices, The Role of the Consumer A fundamental purpose of the free enter Prise system is to give consumers the freedom to make sheir own economic choices. Consumers make their desires known through their economic dealings with producers. When consumers buy wottmotin the reo Dr enecurages people ae erpntatn igre nor raat pen ppetaiy fan cane inde mmatopace egal equaiy fe conept ogg reyane sae fegsras ee opr hs haveine neon rates coos Aros conat ie eoncop pooee mmayéecio nat oletry onchange 28 may deetevat ond ‘eben mont uy competion tery feng sles oat tara wnie lowering cot Chapter3m Section’ 53 products, they signal to producers shar produce and how much to make. ‘Consumers can also make their wishes knowen by joining an imrest group, whichis 2. private organization that tries to Inerestrep spate | persuade public officals to act ar vore guanzatan aries | according, to the imerests of the group's spmamniie | Comber: Inert gouge here formed GEeeEGEeS” | iond canyiocomnice ies, ok on fiber meat | treat, a fo frm a land use pbs dec oe forequint |” | The Role of the Government naman constitutional responsibilities to protect eatctamenine | Proper ih contact and other Business cae mettcpusie | activities in our free enterprise systcm. Even seawale though such protetions are nor spelled out in che Consttucion, many Americans expect protection from problems that affect wally such as pollaion or unsafe foods. We eed ‘New Business in Russia suring snewbusressinfusiisse 45a The avr ne sine acre has eel ih 201030 ies oc neds om 43s mon 9550 prod esa om. In ation many buses have py bese goverment oso ‘ptcenas Becauethe ssn ecoemyis ines bank aeroatle sw bthesss Tes are con uordable ae canbe vey. stoner erent neta apy ta shes eer pet ot sree, aye conixoten co wits nate ney king teat orn bushes een 5A American Fre Enterprise Information and Free Enterprise Tn free marker system, consumer buying habits determine what goods ge produce, Tut consumers will not be able 10 make formed choices if they cannot get basic formation about the produets they are buying In other words, educated consumers will make the fre market system work more efficiently. Becans ofthis, one of he govern ‘en's important roles in the ecomomy i 0 rake sre tht producers provide consumers formation, Consumers use government informa: sion to protect themselves from dangerous products and fraudulent claims. Public Aislosare laws require companies © give consumers importane informacion about heir products. Often this information will be attached to the produce when iis offered for sale in stores, You may have seen fuel efficiency labels on new ears, or energy efficiency tags on releigerators or air conditioners. Using this information, Consumers can evaluate some important aspects of the products they are consid rng buying, Protecting Health, Safety, and Well- Boing Federal and state agencies regulate indus ties whose goods and services affece the well-being of the public. (See Figure 3.2.) Although the government docs tot get Uirecly involved in unning private bust nesses, des impose Wort restrictions. Businesses must follow certain environ mental provection rules. Gas stations, for example, must dispose of used moter oil properly and ensure that gas tanks cannot leak into surrounding soil. Both individuals and businesses are subject 10 local zoning Jaws. These laws may forbid homeowners from running business out of thee homes Tn addition, wnt the mil-1900s, mana facture of cas, food, medicine, and other products affecting people's health and wel boeing were laegely unregulated. Staring in the 1960s, however, the federal government ‘and many sas became atively involved in fconomic mares of public interest. che cancers ofthe public asa whole A key part of this new government activity was eonsumer procetion, To this fend the government sees manufacturing standards, requires tha drugs be safe and elective, and supervises che sanitary condi tioas in which foods are produced. Labels fon consumer packages must include infor mation about safe operation of equipment ‘or expiation dats for perishable. ‘Nogative Effects of Regulation Government regulation, howeves, can have negative effects on both businesses and consumers. During the 19608 and 1970s, ppopul demand fr goveenment protection fof consumers and of the environment resulted it the creation of new govern ‘mental agencies nd regulations. Businesses pointed out that the rules were costly to implement, cutting into profs, slowing growth, and forcing them to charge une: essary high prices. Highly regulated indus tries, such as the air ines and telephone ‘companies, pointed ou that government rules and regulations stilled competition, resalingin prices that were arbitrarily high ‘The growth in government oversight of industry also raised government spending, mn the 1980s and 1980s, public presure for keane, ess costy government resulted in hdger cuts that curtailed some govecnment regulation of industry. President George W. Pee ee fogs artnet cemmnestere brine doranenre soe oat cuan espns svg enozonas bret std pom m0, Oxapssr Sey Hat sinner OHA eugene Prone ane Fate ean ols pac “This table shows afew of he mony federal regulatory gancioe. Government Might the ros markor lhe Isson of any of thos agencies? Give an example Bush’ administration worked to be more sensitive go the economic considerations slsed by businesses, 1 Blain the importance af the fling tems in he US. 5. Decision Mating Explain hw the cisions youmake ‘a3 consume ince the econany, ‘fe onerise sso prot motive, voluntary 6. Critical Thiaking Whats the impact of econonic ‘xchange (lpia propery rights. ond) eampet- concepts inthe US. Consttuson an eentemparary ‘ion ‘cotomi ssues and plies? Use specific examples 12 What Sranionalguarentoes unde the Amaisan_‘amthe chapter supportyour concuios, Go @nline a ‘tee enerpise ssn ‘3. xan at east tree benais othe fe one Applying Economic Concepts faci 4 ict Thakig Wat ae sone pry cons of2 Web coe hd 1 restr goverment le in ora? Chapter3m Section) 55 During the 1994 congressional election campaign, debate raged about how to reduce government spending. Clinton -appointed economist Alice Rive recommended controversial cuts in government programs, When the Republicans, who bad called for tax cuts instead, gained snany seats is the election, the president's political advisors urged that Rivlin be fred. Principles and Politics yey read ep Conger Frat egy pra ‘When Bll Cincom became presiden in bul long snd distinguished carer 1983, he called Risln to serve as Dice Washington. Rivin’sopiions about the ofthe Office of Management and Budget Had anne her 9 re stonpoial economic analyst “lam Served nl 1999. Today Rin y chaic of aa caine cal te dhe Canter on Urba and Mewopolian Sead hiv se Atri lie tthe Brookings Tnsiition ora the Congressional Bde Ofice re “She issomeone who’ called the Rethinking Government's Role shos sigh” he sai. ln shuns both diet fserl spending A Career in Public Service ‘mie growth sea, she prefers programs Asa teenager Alice Rivlin wanted tobe a that crease veal productivity. Risin dlplomae Afr caking am esonomic course ao angus that sping on technolo, lg, howe se decided om that _-anapost, commision, ad Feld instead. Riva alene foe analyring eduction isa benerapprosch growth fovemnmeat poly emerged in 1957, when than euting tne. She werked at the Brooking Instuion,« Rivlin alo question, in gneral, the ‘Washigron “think tae resarses feral gonerment's ol nthe hanes social ie. the 19606, he helped plan stetoe. She args hat programs toad President Johason'’s “Great Sociesy” 2 business should bea the tte eel 11975, Rivlin became the iret head of areas auch ax environmental peotection, reresional Budge Office, federal who effects can he fee across sate Ines 1 Innwresien 2, Woul Ace 3 Deyou agin ‘Spend, Ace Rvinwrot “Everyone to encouage compares thie unan- towering Lanes dons et fev pinout nowt Promoting Growth and Stability ‘Objectives Section Focus Key Terms Aker studying this section you will ‘The government attomptsto stabilize macroeconomics 1. Explain fowthe governmontiracks and business cycles, id the growth of microeconomics ia foftience buaneas cyehs the economy, and encourages ‘ress domestic product 2 Analzehowthe goverament promotes __‘ehnologicalinnovaton, Lal feonomic tength ae work ethic 4. Analyze the effect of technology on technology productivity. i , smrvoconamics se revica’s economy is big—very hig kt gros domestic rodet (6D, che coral value | maemeamoies consis of roughly 108 milion house” ofall inal gods and services peodced in | Sule tere holds of about 288 millon people who an. conomy, Economins follow the | Santosouanes ‘work ar come 137 mon jobs and cam comnry's GDP and other key tai to ‘nore thon 88 trilion a year They make pret hosness eles A bane ele savings deposits of S28 hilhon oesoim about 4 period of macraecanomic expansion | SUureMeaerie 71000 banks, They buyloe 1065 lion followed by » period of contraction, or | Pmmeetésecio homssand17mionautomobiesa yar” dstne. Tse onomie Gel re maj | Shh in Washington, armies of economists use uctustons, unlike the daytoday ups and | fons ‘the latest computer and other technologies downs of the stock market. We are always | S555 to try to predict whether this massive arsome poin inthe busines cycle. CIs | qo densie tet economy will grow or shrink. Econonic may lst kes than a year or continue for | (Gm te fne Policymakers pul inthe reins when the many years, fcomonty bol ac breakneck speed and "Fre enterprise systems are subject co fttemot to ick scar i when eget slow — busine eyces Bete economic decons and unproductive. about factors such as pees, production, nd consumption are made by individuals | sreet nus ; dnd businesses acting in thee own sel Tracking Business Cycles iyire In Amvrcas free enerprse In this secon we'll examine how she system, the government plays a rok in Unied Sates government affects macto- amempting co prevent wild swings in ccoonnic ued Meuivonmais inc: ‘cimanicleharoe Study ofthe havi and decison making. Where we are ina given brine cyle St catie economies. This. branch of affects ou ives every dy. Ii the economy conomics examines major tends for the doesn't create enough jobs, highschool conomy as a nhole, Miceecenemics in graduates have rouble finding work I armas, isthe ceady of the econ iow tim but icons dn onto Behavior and decision making of small buy what we need detns. Ini sch a individuals ami, house aa ee cman acti)" Promoting Economic Strength (One wry ecmomits means ecmomic ‘Becanse the arket is: vloerable to wellbeing is by calculating the nain's busines cyele, the government creates sicrecconmics se {atowety spar ‘eonrenan Chaptor3m Section? 57 ses P a ae ae children, while a plunge in milk prices ce isl datey Sarmers. In eiiee disses, ne ve congener None of us wants to go to the bank and ‘Pitot date) public policies that aim eo sabi the ‘conomy. Policymakers pursue three ‘main outcomes as chy seek to stabi- Ize the economy: high employment, steady growth and stable prices. Entereett goss want ol yarns ‘One aim of federal economic American banks and other Sani nai policy is co provide jobs for sans produces hundreds of relations cvcryone who sable to wotk Inthe gnc hae the power to enforce hem, United Seats, many economists consider an "Feueral entire epuenions sree bank tnemployment rate of between 4 percent deposits and sctieer’ peosions, Federal and percent obe desirable Inthelasthall ‘Pavers savestinte fod ned mates of the ewentith century, the jobless ate ‘SEyere vanes ard the flow of money sage seen 3 peteent ard TI pereent. hyo the economy You'll [asm more hou these Fanon in late chapters Growth Part of the American Decam has always Economic Citizenship ‘been for each generation to enjoy a higher Achieving macroeconomic growth and standaed of living than that of previous —stahilry is nor easy. Through the way it generations. For each generation to do spends money and influences other macro betes the economy must grow to provide economic factors such 3s interest cates, che additional goods and services 10 government helps to compensate for the sueeoeding generations, GDP is a measure ypical swings of the business cycle in our of such growth, economy. 5B American Free Enterprise nero invert Convemion i Phage Do you expect your generation to have 4 higher standand of living chan thar of past generations? As a voter, your elective choices will help guide government fcomomic policy. ‘That’ why is more important chan ever for American citizens to undersand the macroeconomic process that shape our frat. Technology and Productivity ‘The Amerian economy maincins a fa higher standard of ing in terms of GDR than most ofthe word: You've read that fone way to preserve that high standard By increasing producity shine the production posbilies frontier outward Tow do we do tht? One way i though the value of work and purpose acti through improved echnoony. Technological Progress woskete 2 Tecnology isthe process wed to produce a | Semana good or service: Improvements in tech- | "Oke efmat and telogy allow an economy to prodce more ‘up rom the same or sale quantity | tenn he GF inputs or resources. Technological | MOSS met progess allows the United States economy | UC# A906 tocperate more ficiently and productively, increasing GDP and giving US, businesses 2 competveadvanage nthe work "American history is ful of innovations that improved. producivy. Thomas Edison's invention ofthe ight bab in 1879 made possible a longer workday. From resting booms to tractors bo compater, machines have allowed sto generate more goods in a shorter amounc of time with fewer aw materials. Tn adion, although innovation makes come production proces and workers out oda, or obsolete, these resources can be rnp, od indus ised in ther ways, Fore Chapter 3m Section? 59 trial buildingvean beconversed example of such an institution is the eed inwo stores or apariments. Old National Aeronautics and Space penswe | machines ean be recycled and Administration (NASA). Technology wud ioproducenew machines. ereaced by NASA co blast humans into space and co explore discane planets has ‘The Government's Role produced amazing “spinoffs,” products Inventiosarethe engine ofthe with commercial uses. NASA spinoffs fice enterprise system, They inchide everything fom a muscle stimulator help us to build "more-bewer- for people with paralysis ro a scanner that fase,” thus giving consumers allows firlightses wo see “invistble flames ‘more economic choices. given off by alcohol or hydrogen fies Recognising the need foriamo- The goverment also plays a cle in inno: vation to maintain America® vation by offering inventors the possiblity technological advantage, the of making huge profit in the fe market. Ie government provides incen- does so by granting patents and copysighs. ‘vs for innovation, [AUS patent gives she inventor ofa new Federal agencies fund product dhe exclusive right to produce and scores of research and development projects sell it for 20 years. A copyright grants an at universities. The Morrill Acts of 1862 author exclusive rights to publish and sell and 1890 created so-called land-grant _hisor her ereative works. colleges that received federal land and The Framers ofthe Constitution foresaw ‘money to purse the study of “agriculture the economic need to create incentives for and the mechanical arts." Land-grant innovation. Congressional authority 10 schools from the Massachusetts Institute issue patents and copyrights is stated in of Technology to Texas ASM University Article 1, Section 8 of the Constination. It have been powerhouse of innovation ives Congress the power to “promote the ‘The governments own research insticu- progress of science and useful arts by sions ako produce a steady stream of new securing for limited times to authors and technologies that make their say into the inventors the exclusive right vo heir respec marketplace. Probably the bescknown ive writings and discoveries” Sa Key Terms and Main ideas Applying Economic Concepts 1. Conpee mecrstonmics wth ieoeonenie and 7, Decision Maing Are he macroeconomic ols of Gvemevonplet eh INT} molar grove ond diy bot et yh pub sacor orb the prvatosacor? Expl Cita! Thinking Explain haw scenic discoveries end technological inmvation eros the need Torres and gules to protect nel and ushestes. [I 2 wes es een es pre Moet aeesorees wor i (WE) 2, vat oes Pe esanonns sour banes ple? 4. Give ane exemple of ne tectnelagy hatha esuked in greater produtuity forte United States. 5. aon dope nd copia pronte star? (Hon cor erates ether? MF For: Research Aetity 6 Descrite snd analyz hor economi sdiiys. VisicPisehackeom measures Wb Code: mn 1022 60 American Fre Enterprise Skills for LIFE Analyzing Primary Sources primary sour is infrmation produced during or soon afer an event, ‘usualy by a paripant or absorvet. Although primary sources can eon veya strong sense of an event or historical prio, they may be inaccurate or biased. For that reason, you must analyze primary sources excl. Read the passage below, writen during the early 18805, and then practice analyzing Primary sources by following these stops. ‘4. Idotity the documont. Read che passage (b) How did che Depression affect for tone and authorship (a) What sort the family? ‘of document is this? (b) Who isthe suchor? Howe can you tll? the document. Read cially ro determine the imporance of the 2. Imerpretthe contents of the dacument. selection. (a) What do you think the ‘Compare the deals ofthis document purpose of the sory was when it was to what you aleady know about the published in 19347 (hy Is this story Geear Depresion. (a] How did the ‘consistent with the economic sass family live belore the Depression? below? ‘Noy Tromp Tells ofthe ‘i oe Additional Practice Bute atalang swe bret Finda primary source document oul cae eon ae wore even us ‘that eancerns unemmployrnent ina li ehinesthaein kate eh. J titeron perio ofthe history ofthe armed paps. fd Mara eo ae or United States, What similaribes and Fal ke. Mata aay sam sawing forte nogitos. Wehads Cw ands irencee do ounces rao anes pane. | even sare a igh eal mong, oy the ig Woe Ded gsc sual Bt we never bau anvang ot When comes te ecko work cr gta eh, ard ovo teal asta sa see a bo ha up Heat epi f shes toa mete bit sierthap mech. ‘Ns Rov uebrd gta cut an no cans Mane. Jin ha gute paper oe tecavse otal hi cah customers. 08 the oersnever ald Nobody ward Mothert sew ating Sauce: Tur Vineen. oan i Taps ofAmaca,owYrk Het, Racha iii asi vba vc Wing, e138, Ye Section Focus Providing Public Goods Key Terms ‘Aer staying this section you willbe ableto: The government sometimes stepsin public good Citeafsomrapneme Rpetccnann one bate cotaeicnmeectr Reser 2 Anas ara ses. Raat be erate - Teaser emeeseas — omerenvemaane Fae Stance monte enine ssc hat if the government decided +0 leave che business of road building up to private citizens? If you wanted a road in front of your house, you'd have to pay a conractor to build it. OF mare likely vos and your neighbors could chip in and hire someone to build you a small network of streets. What problems might arise in his scenario? For one thing, if groups of individ- vals poole their money to build «road or a Freeway, who would chey allow’ co use it? ‘Would drivers have to constanly stop and pay the owners ofeach road they drove on? How would individuals living in sparsely populated areas come up with enough ‘aomey 10 build the zoads they node? Public Goods Roads are one of many examples in which the government provides a public good, 2 shared good or service for which i would be imeficenc or impractical (1) ro make consumers pay individually and (2) t0 exclude nonpayers. Dams are another ‘example of public goods. Let's look atthe first feature, making consumers pay individually: How would swicrawotdoe | you like to receive bill in your mailbox ‘onactentomsie | for your. shace of launching. 2 space ‘tdvaushyoréee | sbuctle or eleaning Mount Rushmore? frchaererayers | simplify che funding of government 62 American Fee Enterprise projects in the public imeres, the govern= sent collects taxes. ‘What about the second feature of a public good, excluding nompayers? As a Soxiety, we believe that certain facilites or services should be available eo all. Besides, excluding nonpayers from highways would bea nightmare ‘Most goods are public simply because 2 private provider could not charge those who benoit or exclude nonpayers from benefiting. For example, in 1872, Congress created the nation’s first nacional park, Yellowstone. The national park system ensured that the natural resources “Americans value would be protected Ifa park weee peivately owned, the ‘owner could charge an admission fee. Yer some benefice generated by the park, such as the preservation of wildlife, would be enjoyed by nonpayers as well as payers. ‘The owner could neither charge people for that public benefic nor exclude them from it Public goods have other characteristics: Any number of consumers can use them ‘without reducing the benefits co any sin consumer. For the most pat, increasing the numberof consumers does ot increase the cost af providing the public good, So if you're driving on a highway and eight ‘ther drivers come along, they do not significantly reduce the road's benefits to ‘you or inerease the governments cost of providing it. Costs and Benefits As you read in Section 1, the federal sovemnment steps in to actin the publi inerest whenever it determines that the henetits of a policy outweigh the draw. hacks. In road construction, the advan tages ace obvious. The drawback is the fof us individually gets to decide what rons willbe but, and where, Sil inthis example the advantages of public road rsion outweigh the drawback, In ‘cher eases, weighing benefis against costs ismore complicated and open to debate Cost is critical im determining whether soanething gets prodaced as a public good, When a good or service is publi {the benefit to cach individual i ess than the cost chat cach wold have to pay iti were provided privately, and 2.the eotal benefits to society are greater than ehe tal cost, In such circumstances, the market would not provide the goods the government wold have to, or ele ie wouldnt get dane Stuy corefally Figure 3.4 on the next page Does the dam building project meet the | Seine aconony bat two criteria fora public ood? ivovese Public goods ace financed by che puble | tesactan othe seetar, the part of the economy that | meN involves the transactions of the B0¥¢""- | rg sete pat men. The private seeter, the part of the | Mine seonsmy dur ‘economy tha involves transactions of ind- | ives oe viduals and businesses, would have litle | ©#%#=ton of incentive vo produce pubic goods int Froo Rider Problam tees snore A phenomenon associated with public | tx ete one ila the feeder problem.” A | Perera Sows gete to pay fora een good or servic, bur | Srtwotfepeny would gc the bene is of it anyway it | snow ponttare were prove a publ geod potas ‘Would you voles contbae, 5, $3,500 soy anny hl your portion Peshape ot. Yer when the goverment provi system a maton eens, 0 Bena, whether you pay o act. Try another example Eeryone on your pemy pinching neighbor who soy snot have fire protecon anya? Yes If hie goods is ‘nei Chapter 3mSection3 63 = Feane ‘enatit rouse catches fire, yours could ignite as well, So local taxes pay for firefighting serves forall property in a given area, because all residents are beter off if the jernient provides this service Returning tothe example of roads, you sight noe be willing to pay for a nev freeway in your area, Buti es bull, you i. You would bea fre ride: ‘do not would Free riders consume what the pay for. The free-rider problem suggests hat if the government stopped collecting faxes and relied on voluntary contribi= sions, many public services would have to becliminate. Free riders are examples of mart file, 2 situation in which the market, om its own, does not distribute resources ficiently. To understand market failure, recall how 2 successful free marker operates: Choices made by individuals determine what goods ser made, how they get_made, and who jonsimes the goods. Profc incentives atteaet producers, who, because of compe ition, provide goods’ and services that consumers need 3 a price they can afford In the eoad-building scenario, are these feagutes of a free market present? No, Ia company dil build a road, ic could charge a high price for rolls because ir would have no competition. Also, companies would not choote to build roads in sparsely populated seas hecatee prof ncentves im hose areas right be non-existing. This way of geting roads ule would be highly impracrcal Tn this scenario, the criteria for a properly functioning marker system do not exist, That's why economists consider this ‘ination a markee failure ‘ote that publicownership cam sometimes prodice negative externaliies, however Some public lands, for example, might be sore useflly managed if owned privately. This diagram shows the processthat detemines whether a public god wie ganerated DOpporeanty Costs th tar tothoirfeles, woul the dtl Cont to bola te gam, 64 American Free Enterprise ary th oko water ‘Stop 2 A pubic gods exerted paca ‘he government conidars beogt met na Constction of new dar orestes dans of temaltie, postive and depending on your pont at view. Public Policy What groups Negotiveextmatiion oss ofwidifehabast doe eight el he P,sreatest economic impact rom the new dan? Externalities All ofthe previous examples involve side cifects of some sort. Ther illntate what ‘economists ell extemaliies. An extemal is an economic side effet of a good a service thar generates benefice or costs to someone ‘cher than che person deciding hov much a produce or consume, Externalities can be positive or negative, a8 follows We've said that public goods generace henefts to many people, not just those who pay for the goods. Such beneficial side ctfecrs are called positive externalities. The private sccrar can create positive externalities, too, In fact, any experts believe that the private sector generates Positive extemaltes more effciemly than the public sector can, and at less cost to taxpayers. For inseance + Dynamo Computes hires underprivileged teenagers and trans them to be computer programmers. Those workers are then available to be hired by other companies, who benef from the workers" skills without having paid for ehem. * Mrs. Garland buys an old bouse tha i aan cyesore in the neighborhood. She paints the house, cuts the grass, and plants flowers. Her neighbors were not Jnvolved in her economic decision. But they receive henefis from it, such as higher property values and a beter view. | tain prin Whether private ot public, postive | romney erconsne, ‘exteanalities cause pare of the Bens of 2 ‘good 10 be gained by someone who did not purchase it. In the 1990s, several endan sered species, ineluding the bald eagle and the peregrine falcon, were saved from ‘extinction. Protection of species critical 0 ‘our ecosystem benefits ws al. Nogative Externalities (OF couse, some decisions to produce goods and services generare unintended costs, called. negative externalities, Negative externalities cause part of the cost of producing a good or service to he paid for by someone other than the producer For example: The Enchanted Forest Paper Mill ups chhemical wastes into a nearby river, making it unsafe for swimming. The ddownseream city of Tidyille i forced 10 install special equipment at its wacer treatment plant 10 clean up the mess. If ‘the treatment costs $20 per ton of paper Chapter 3uSection3 65 seas labor and ‘up paying that $20, Dackyard Government's Goals When externalities are pr “American ecomomy. Fics, the government encourages the of positive externalities, Fdveation, students, yet society 18.8 whole also benefits fram an educated for example, bent produced, and the mill's prodetion cos is $100 (che cose of all the materials, machinery requited w produce it), the fall, social, costof a ton of paper is $120, The coma tity, noe the polluter, winds ‘Your next-door neighbor, Me. Fogler, cakes up the accordion and holds Friday night polka parties in his Unfortunately, you hate polka msc. cnt, we have a market failure, because the costs or benefits of a good of service are not assigned properly: Understanding externalities helps tus see how the government functions in the popalation. This is because educated ‘workers ate generally more productive Next, the government aims co limit negative externalities, such as avidin, Pollucants from coal-burning power plants and auto emissions can drift high into the Atmosphere and come down in che form of acid rain, which causes ecological damage. ‘Why isacid rain a negative externality? Iris part of the cost of producing power and