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Public Goods & Common Resources

Public goods are non-excludable and non-rival, meaning no one can be prevented from using them and one person's use does not reduce availability to others. Common resources are rival but non-excludable, so overuse can occur without regulation. The free rider problem prevents private markets from providing many public goods, so governments often supply them instead. Tragedies of the commons can arise when common resources face excessive use without coordination.

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246 views15 pages

Public Goods & Common Resources

Public goods are non-excludable and non-rival, meaning no one can be prevented from using them and one person's use does not reduce availability to others. Common resources are rival but non-excludable, so overuse can occur without regulation. The free rider problem prevents private markets from providing many public goods, so governments often supply them instead. Tragedies of the commons can arise when common resources face excessive use without coordination.

Uploaded by

tanza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter

11

Public Goods and Common


Resources
The Different Kinds of Goods
• Excludability
– Property of a good
– A person can be prevented from using it
• Rivalry in consumption
– Property of a good
– One person’s use diminishes other people’s
use

2
Figure 1
Four types of goods
Rival in consumption?
Yes No
Private goods Natural monopolies

Yes - Ice-cream cones - Fire protection


- Clothing - Cable TV
Excludable? - Congested toll roads - Uncongested toll roads
Common resources Public goods

No - Fish in the ocean - Tornado system


- The environment - National defense
- Congested nontoll roads - Uncongested nontoll roads

Goods can be grouped into four categories according to two characteristics:


(1) A good is excludable if people can be prevented from using it.
(2) A good is rival in consumption if one person’s use of the good diminishes other
people’s use of it.
This diagram gives examples of goods in each category.
3
The Different Kinds of Goods
• Types of goods
– Private goods
• Excludable & Rival in consumption
– Public goods
• Not excludable & Not rival in consumption
– Common resources
• Rival in consumption & Not excludable
– Natural monopoly
• Excludable & Not rival in consumption

4
The Different Kinds of Goods
• Public goods & Common resources
– Not excludable
– People cannot be prevented from using them
– No price attached to it
– Positive externalities
– Negative externalities

5
Public Goods
• The free-rider problem
– Free rider
– Person who receives the benefit of a good but avoids
paying for it
– Public goods – not excludable
• Free-rider problem prevents the private market
from supplying the goods
• Government - can remedy the problem
– If total benefits of a public good > its costs
– Provide the public good
– Pay for it with tax revenue
– Make everyone better off 6
Public Goods
• Some important public goods
– National defense
• Very expensive public good
– Basic research
• General knowledge
– Fighting poverty
• Welfare system
• Food stamps

7
Are lighthouses public goods?

• Lighthouses
– Mark specific locations so that passing ships can
avoid treacherous waters
• Benefit - to the ship captain
– Not excludable, not rival in consumption
• Incentive – free ride without paying
– Most - operated by the government
• In some cases
– Lighthouses - closer to private goods
• Coast of England, 19th century
– Lighthouses – privately owned and operated
– The owner - charged the owner of the nearby port
8
Are lighthouses public goods?

• Decide whether something is a public good


– Determine who the beneficiaries are
– Determine whether the beneficiaries can be
excluded from using the good
• A free-rider problem
– When the number of beneficiaries is large
– Exclusion of any one of them is impossible

9
Public Goods
• The difficult job of cost–benefit analysis
– Government
• Decide what public goods to provide
• In what quantities
– Cost–benefit analysis
• Compare the costs and benefits to society of
providing a public good
• Doesn’t have any price signals to observe
• Government findings on the costs and benefits
– Rough approximations at best
10
How much is a life worth?

• Cost: $10,000 – new traffic light


• Benefit: increased safety
– Risk of a fatal traffic accident
• Drops from 1.6% to 1.1 %
• Obstacle
– Measure costs and benefits in the same units
• Put a dollar value on a human life
– Priceless = infinite dollar value

11
How much is a life worth?

• Put a dollar value on a human life


– Implicit dollar value
• Courts - award damages in wrongful-death suits
– Ignores other opportunity costs of losing one’s life
• Risks - people are voluntarily willing to take
– Value of human life = $10 million

• Cost-benefit analysis
• Traffic light
– Reduces risk of fatality by 0.5 percentage points
• Expected benefit = 0.005 × $10 million = $50,000
• Cost ($10,000) < Benefit ($50,000)
• Approve the traffic light
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Common Resources
• Common resources
– Not excludable
– Rival in consumption
• The tragedy of the commons
– Parable - why common resources are used
more than desirable
• From society’s standpoint
– Social and private incentives differ
– Arises because of a negative externality
13
Common Resources
• The tragedy of the commons
– Negative externality
• One person uses a common resource
– Diminishes other people’s enjoyment of it
• Common resources tend to be used excessively
– Government - can solve the problem
• Regulation or taxes
– Reduce consumption of the common resource
• Turn the common resource into a private good

14
Common Resources
• Some important common resources
– Clean air and water
– Congested roads
– Fish, whales, and other wildlife

15

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