• Think about needs and wants in a society
• Why can Free Markets better provide needs
and wants than a Command Economy?
• Incentives?
• What if the Free Market fails?
• What if a want is NOT filled by private
ownership/business?
Let’s play a game
• Goal: “to accumulate as many points as
possible without helping or hindering the
other player”
• Each player will hold up a red or blue card
• Several rounds, keep score as we go
Choice
Result
Player 1
Player 2
Player 1
Player 2
Blue
Blue
+4
+4
Blue
Red
-7
+7
Red
Blue
+7
-7
Red
Red
-4
-4
• Reflection:
– What did you predict would happen?
– What would have resulted in the optimal benefit
to both players?
– What happened?
– What prevented the best outcome for all from
happening?
• Why do you think this happened?
•
•
•
•
Consider another scenario:
IF ¾ of the class contributes, then:
25pts extra credit to EACH student
Contribution =
– “I voluntarily offer this contribution towards the
provision of this public good, even though I know
that if the good is provided, I will enjoy its benefits
whether I made a contribution or not” x 100
• What is the nature of this scenario and public
good?
When and why Free Markets may fail
• Public Good =
– Non-excludable (open to all)
– Cooperation needed
– Benefits don’t diminish as more enjoy them
• What is the problem? What would you do?
• Your best cost/benefit?
• Your best incentive?
Free Rider Problem
• Private business/individuals lack incentive to
produce something
• But, society wants something
• Examples:
Private Sector
Public Sector
Business Owner
Benefit:
Cost:
Decision?
City Council
Benefit:
Decision:
Cost:
Total Benefit vs. Cost?
Externalities (Side Effects)
• Positive
Externalities
• Negative
Externalities