Public Goods and

Common Resource

11

The best things in life are free. . .

Most goods in our economy are allocated in
markets
Free goods provide a special challenge for
economic analysis.

The best things in life are free. . .

When goods are available free of charge, the market
forces that normally allocate resources in our economy
are absent.
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 =>
market failure
In such cases, government policy can potentially
remedy the market failure, and raise economic wellbeing.

THE DIFFERENT
CHARACTERISTICS OF GOODS
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 in consumption?

THE DIFFERENT
CHARACTERISTICS OF GOODS
Excludability
Excludability refers to the property of a good
whereby a person can be prevented from using it.
If anyone can use a good without paying for it, then it
does not have a price (or the price is zero).

Rivalry
Rivalry refers to the property of a good whereby
one persons use of the good diminishes other
peoples ability to use that good.

THE DIFFERENT
KINDS OF GOODS
Four Categories of Goods

Private Goods
Public Goods
Common Resources
Natural Monopolies

THE DIFFERENT
KINDS OF GOODS
Private Goods
Are both excludable and rival.

Public Goods
Are neither excludable nor rival.

Common Resources
Are rival but not excludable.

Natural Monopolies
Are excludable but not rival.

Four Types of Goods

Rival?
Yes

Yes

No

Private Goods

Natural Monopolies

Ice-cream cones
Clothing
Congested toll roads

Fire protection
Cable TV
Uncongested toll roads

Common Resources

Public Goods
Tornado siren
National defense
Uncongested nontoll roads

Excludable?

No

Fish in the ocean

The environment
Congested nontoll roads

Broadcast TV
GPS

Public goods and common resources each create externalities:

they have value yet have no price because they are not sold in the
marketplace.
The external effects imply that market outcomes will be inefficient in the absence
of government involvement or private resolutions to correct the externality.

Natural Monopolies may provide

goods or services free of charge
Sometimes Natural Monopolies may choose to provide
their goods or services free of charge.
Googles search services or video available on
YouTube vs geolocation by GPS or IP.
Services such as those of Google and Youtube are excludable

(e.g., Netflix).
Providing them at no charge is a business strategy choice.
GPS and IP based geolocation are public goods (provided,

respectively, by the DoD and the Internet Assigned Numbers

Authority (IANA) which is a non-profit organization).
No one with a GPS device or access to the internet can be
excluded from access to these services.

Common resources vs. Public Goods

Both types of goods involve externalities:
The externalities associated with public goods are positive.
Non-rival => The benefits from the public good received by one person don't
reduce the benefits received by anyone else => the social value of public
goods is greater than the private value.
Examples: National defense, knowledge, uncongested non-toll roads, uncongested parks.

Public goods aren't excludable => the free-market quantity is zero

=> so it is less than the efficient quantity.

The externalities associated with common resources are negative.

Common resources are rival but not excludable (so not priced)
=> the use of the common resources by one person reduces the amount
available for others.
Since common resources are not priced, people tend to overuse them
=> their private cost of using the resources is less than the social cost.
Examples: Fish in the ocean, the environment, congested non-toll roads, and congested
public parks

Examples of Public Goods

A fireworks display.
It is not excludable because it would be nearly
impossible to keep others from viewing it
It is not rival because one persons enjoyment does
not preclude others from enjoying the fireworks.

The Free-Rider Problem

A free-rider is a person who receives the
benefit of a good but avoids paying for it.
Since no one can be excluded from enjoying the
benefits of a public good,
=> some people may withhold paying for the good
hoping that others will pay for it.

The free-rider problem prevents private markets

from supplying public goods.

The Free-Rider Problem

Solving the Free-Rider Problem
The government can decide to provide the public
good if the total benefits exceed the costs.
GPS

The government can make everyone better off by

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

Some Important Public Goods

National Defense
Basic Research
Fighting Poverty
Highways
Snow removal
Flood control
Mosquito control
In all of these instances, government intervention is
necessary in order to achieve economic efficiency.

What category each of the following goods falls into?

Police protection
It is a natural monopoly, since it is excludable (the police may ignore some
neighborhoods) and not rival (unless the police force is overworked, they're available
whenever a crime arises).
But it is rival, if the police are too busy to respond to all crimes, so that one person's use of the
police reduces the amount available for others; in that case, police protection is a private good.

Education
It is a private good (with a positive externality). It is excludable, since someone who
doesn't pay can be prevented from taking classes. It is rival, since the presence of an
additional student in a class reduces the benefits to others.

Rural roads
They are public goods. They aren't excludable and they aren't rival since they're
uncongested.

City streets
They are common resources when congested. They aren't excludable, since anyone can
drive on them. But they are rival, since congestion means every additional driver slows
down the progress of other drivers.
When they aren't congested, city streets are public goods, since they're no longer rival.

CASE STUDY: Are Lighthouses Public

Goods?
Lighthouses are used so that ships can mark
specific locations and avoid treacherous waters.
Use of a lighthouse is both nonexcludable and
nonrival.
Thus, most lighthouses are provided by the
government.
In 19th century England, lighthouses were
operated more like private goods.
The owners of local ports were charged for the
service and if they did not pay, the owner of the
lighthouse simply turned off the light and ships
avoided stopping in that port.

The Difficult Job of Cost-Benefit Analysis

What are the differences in the way a business
provides and finances its products and the way
that governments do the same?
In order to decide whether to provide a public
good or not, the total benefits of all those who
use the good must be compared to the costs of
providing and maintaining the public good.
Cost benefit analysis refers to a study that
compares the costs and benefits to society of
providing a public good.

The Difficult Job of Cost-Benefit Analysis

A cost-benefit analysis would be used to
estimate the total costs and benefits of the
project to society as a whole.
It is difficult to do because of the absence of prices
needed to estimate social benefits and resource
costs.
The value of life, the consumers time, and
aesthetics are difficult to assess.

Case Study: How Much Is a Life

Worth?
What is the value of YOUR life?
Example: the decision to place a stoplight at a busy intersection
to reduce the risk of fatal accidents.
The cost is known in dollar terms. But how can we put the value of a life
in dollar terms?
Some studies examine the value of the lifetime earnings the individual
could have made, but this implies that the life of someone who is
disabled or retired has no value.

Instead, economists often look at the risks that individuals

voluntarily take and those that they require compensation for.
Workers in risky occupations are paid a wage premium to take these
risks.
This approach gives us an idea of the value that an individual places on
his life.
Studies have shown this value to be approximately $10 million.

COMMON RESOURCES
Common resources, like public goods, are not
excludable.
They are available free of charge to anyone who
wishes to use them.

Common resources, unlike public goods, are

rival goods
one persons use of the common resource reduces
other peoples use.

Tragedy of the Commons

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.

Example: small, medieval town where

sheep graze on common land
Over time, as the population grows, so does the number of
sheep.
Given the fixed amount of land, the grass will begin to
disappear because it is being overgrazed.
The townspeople will no longer be able to raise sheep
because the private incentives (using the land for free)
outweigh the social incentives (using the land carefully).
Ways to prevent this problem? The town could:
regulate the number of sheep each farmer could have
auction off the right to use the common land for grazing.
divide the common property between its citizens thus turning the
land into an excludable commodity.

Some Important Common Resources

Clean air and water
Congested roads
Fish, whales, and other wildlife
overfishing of oceans, bays, and rivers,
leading to dangerously low seafood
populations in some areas.
Oilfields that can be reached from multiple lots
which belong to different property owners
Excessive extraction of oil from the pool beneath
those lots.

CASE STUDY: Why Isnt the Cow Extinct?

Will the market protect me?

Private
Ownership and
the Profit
Motive!

CASE STUDY: Why Isnt the Cow

Extinct?
Elephants in Africa are common resources because no one
owns them.
This means that no one has an incentive to make sure that a
sufficient number are preserved.

What about cows?

It is usually owned by a ranch.
The rancher has an incentive to ensure that the cattle population on
his ranch is maintained so that he can continue to earn a profit.

Governments could be more successful in making sure that

the elephant is not extinct by allowing people to kill the
elephants on their own property (thus making the
elephants a private good).
The landowners would then have some incentive to preserve the
stock of elephants on their land.

CONCLUSION: THE IMPORTANCE OF

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

With both public goods and common resources,

the market outcome will be inefficient because
of the lack of well-defined property rights.
When the absence of property rights causes a
market failure, the government can potentially
solve the problem.

An article in the Economist states:

In the past decade most of the rich worlds fisheries have been
exploited to the point of near-exhaustion.
Do not blame fishermen for overfishing. They are behaving
rationally, as they have always done.
In what sense is overfishing rational for fishermen?
Overfishing is rational for fishermen since they're using a common resource. They don't
bear the costs of reducing the number of fish available to others, so it's rational for them
to overfish. The free-market quantity of fishing exceeds the efficient amount.

A community held together by ties of obligation and mutual selfinterest, can manage a common resource on its own. How such
management can work in principle? What obstacles it faces in the real
world?
A solution to the problem could come from regulating the amount of fishing, taxing
fishing to internalize the externality, or auctioning off fishing permits. But these solutions
wouldn't be easy to implement, since many nations have access to oceans, so
international cooperation would be necessary, and enforcement would be difficult,
because the sea is so large that it is hard to police.

An article in the Economist states:

Until 1976 most world fish stocks were open to all comers,
making conservation almost impossible. Then an international
agreement extended some aspects of national jurisdiction from 12
to 200 miles offshore. In the context of the concept of property
rights, how does this agreement reduces the scope of the problem?
By giving property rights to countries, the scope of the problem is reduced, since
each country has a greater incentive to find a solution. Each country can impose a tax
or issue permits, and monitor a smaller area for compliance.

The article notes that many governments come to the aid of

suffering fishermen in ways that encourage increased fishing. How
do such policies encourage a vicious cycle of overfishing?
Since government agencies (like the Coast Guard in the United States) protect
fishermen and rescue them when they need help, the fishermen aren't bearing the full
costs of their fishing. Thus they fish more than they should.

An article in the Economist states:

Only when fishermen believe they are assured a longterm and exclusive right to a fishery are they likely to
manage it in the same far-sighted way as good farmers
manage their land. Is this statement sensible?
The statement is sensible. If fishermen owned the fishery, they would be
sure not to overfish, because they would bear the costs of overfishing.
This is a case in which property rights help prevent the overuse of a
common resource.

What other policies to reduce overfishing might be

considered?
All policies that tend to reduce the amount of fishing from the freemarket amount toward the efficient amount.
Alternatives include regulating the amount of fishing, taxing fishermen,
auctioning off fishing permits, or taxing fish sold in stores.

Summary
Goods differ in whether they are excludable and
whether they are rival.
A good is excludable if it is possible to prevent
someone from using it.
A good is rival if one persons enjoyment of the
good prevents other people from enjoying the same
unit of the good.

Summary
Public goods are neither rival nor excludable.
Because people are not charged for their use of
public goods, they have an incentive to free ride
when the good is provided privately.
Governments provide public goods, making
quantity decisions based upon cost-benefit
analysis.

Summary
Common resources are rival but not excludable.
Because people are not charged for their use of
common resources, they tend to use them
excessively.
Governments tend to try to limit the use of
common resources.

Public Goods and Common Resource: A Review

1. What is meant by a good being excludable? What is meant

by a good being rival? Is a hamburger excludable? Is it
rival?

2. What is a public good? Can the private market provide a

public good on its own?
3. What is a common resource? Without government
intervention, will people use this good too much or too
little?

Public Goods and Common Resource: A Review

What is meant by a good being excludable? What is meant by

a good being rival? Is a hamburger excludable? Is it rival?

An excludable good is one that people can be prevented from using.
A rival good is one for which one person's use of it diminishes
another person's enjoyment of it.
Hamburger is both
excludable, since a hamburger producer can prevent someone from eating
it who doesn't pay for it,
rival, since when one person eats it, no one else can eat it.

Public Goods and Common Resource: A Review

What is a public good? Can the private market
provide a public good on its own?
A public good is a good that is neither excludable nor rival.
An example is national defense, which protects the entire
nation.
No one can be prevented from enjoying the benefits of it, so it is not
excludable,
An additional person who benefits from it does not diminish the
value of it to others, so it is not rival.

The private market will not supply the good

No one would pay for it since they cannot be excluded from
enjoying it even if they don't pay for it.

Public Goods and Common Resource: A Review

What is a common resource? Without government
intervention, will people use this good too much or too
little?
A common resource is a good that is rival but not excludable.

An example is fish in the ocean.

If someone catches a fish, that leaves fewer fish for everyone else, so
it's a rival good.
But the ocean is so vast, you cannot charge people for the right to fish,
or prevent them from fishing, so it is not excludable.

Thus, without government intervention, people will use the

good too much, since they don't account for the costs they
impose on others when they use the good.