Class Notes

Week 4

Private Sector

The private sector is the part of the economy that is owned and controlled by individuals. Private goods, similarly, are the goods that belong to the individual (not to the public). Thus most businesses, personal vehicles, and homes are all privately owned. All these are controlled by private choice and kept for private benefit.

Private Sector Exchanges

When one makes an exchange (transaction), both parties involved should benefit. If I sell you food, you benefit from eating and I from the money you exchanged for the food. Since we all want to make the exchanges which benefits us most, we look make an efficient exchange. Competition tends to improve efficiency, since people will look for the most beneficial exchange.

Private Sector Markets

A market is comprised of the exchange activities that occur between buyers and sellers. Markets offer many choices to the buyers. Producers in a market will attempt to increase their profits but must be careful to always provide what the consumers want lest they lose market share. Entrepreneurs take the risk of producing a unique product for a profit. Private enterprise is a system in which entrepreneurs operate their ventures.

Private Sector Problems

Markets have three major pitfalls. (1) Market competition is at times reduced causing less efficiency in the market. For example, is a local grocer closes its doors because it could not compete with the supermarket, the supermarket will not have an competition locally. (2) Public goods are sometimes used for private benefit. For example, the building of roads benefits the private sector more than the public. Thus the public sector supports the efficiency of the private. (3) Costs and benefits are at times passed out of the market system. These are called externalities or spillover effect. Negative externalities are consequences of decisions made for one benefit but may cause dissatisfaction to others. For example if a person buys a big dog, the constant barking and large dog droppings may be quite bothersome to the neighbors. On the other hand, if the constant barking scares away a burglar from entering a neighbor’s home, that would be a positive externality.