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    Public Goods and Common Resource

    Uploaded by

    Nabila T. Chowdhury

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    Attribution Non-Commercial (BY-NC)
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    Public Goods and Common Resource

    Uploaded by

    Nabila T. Chowdhury
    79 views27 pages

    Original Title

    11.Public Goods

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    © Attribution Non-Commercial (BY-NC)

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    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    79 views27 pages

    Public Goods and Common Resource

    Uploaded by

    Nabila T. Chowdhury

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 27

    Public Goods and

    Common Resource
    11
    Copyright©2004 South-Western
    “The best things in life are free. . .”
    • Free goods provide a special challenge for
    economic analysis.
    • Most goods in our economy are allocated in
    markets…

    Copyright © 2004 South-Western


    “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.

    Copyright © 2004 South-Western


    “The best things in life are free. . .”
    • 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.

    Copyright © 2004 South-Western


    “The best things in life are free. . .”
    • In such cases, government policy can
    potentially remedy the market failure that
    results, and raise economic well-being.

    Copyright © 2004 South-Western


    THE DIFFERENT
    KINDS 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?

    Copyright © 2004 South-Western


    THE DIFFERENT
    KINDS OF GOODS
    • Excludability
    • Excludability refers to the property of a good
    whereby a person can be prevented from using it.
    • Rivalry
    • Rivalry refers to the property of a good whereby
    one person’s use diminishes other people’s use.

    Copyright © 2004 South-Western


    THE DIFFERENT
    KINDS OF GOODS
    • Four Types of Goods
    • Private Goods
    • Public Goods
    • Common Resources
    • Natural Monopolies

    Copyright © 2004 South-Western


    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.

    Copyright © 2004 South-Western


    Figure 1 Four Types of Goods

    Rival?
    Yes No
    Private Goods Natural Monopolies

    Yes • Ice-cream cones • Fire protection


    • Clothing • Cable TV
    • Congested toll roads • Uncongested toll roads
    Excludable?
    Common Resources Public Goods

    No • Fish in the ocean • Tornado siren


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

    Copyright © 2004 South-Western


    PUBLIC GOODS
    • A free-rider is a person who receives the
    benefit of a good but avoids paying for it.

    Copyright © 2004 South-Western


    The Free-Rider Problem

    • Since people cannot be excluded from enjoying


    the benefits of a public good, individuals may
    withhold paying for the good hoping that others
    will pay for it.
    • The free-rider problem prevents private markets
    from supplying public goods.

    Copyright © 2004 South-Western


    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.
    • The government can make everyone better off by
    providing the public good and paying for it with tax
    revenue.

    Copyright © 2004 South-Western


    Some Important Public Goods

    • National Defense
    • Basic Research
    • Fighting Poverty

    Copyright © 2004 South-Western


    CASE STUDY: Are Lighthouses Public
    Goods?

    Copyright © 2004 South-Western


    The Difficult Job of Cost-Benefit Analysis

    • Cost benefit analysis refers to a study that


    compares the costs and benefits to society of
    providing a public good.
    • 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.

    Copyright © 2004 South-Western


    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 consumer’s time, and
    aesthetics are difficult to assess.

    Copyright © 2004 South-Western


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

    Copyright © 2004 South-Western


    COMMON RESOURCES
    • Common resources are rival goods because one
    person’s use of the common resource reduces
    other people’s use.

    Copyright © 2004 South-Western


    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.

    Copyright © 2004 South-Western


    Some Important Common Resources

    • Clean air and water


    • Congested roads
    • Fish, whales, and other wildlife

    Copyright © 2004 South-Western


    CASE STUDY: Why Isn’t the Cow Extinct?

    • Will the market protect me?

    Private
    Ownership and
    the Profit
    Motive!

    Copyright © 2004 South-Western


    CONCLUSION: THE IMPORTANCE OF
    PROPERTY RIGHTS
    • The market fails to allocate resources
    efficiently when property rights are not well-
    established (i.e. some item of value does not
    have an owner with the legal authority to
    control it).

    Copyright © 2004 South-Western


    CONCLUSION: THE IMPORTANCE OF
    PROPERTY RIGHTS
    • When the absence of property rights causes a
    market failure, the government can potentially
    solve the problem.

    Copyright © 2004 South-Western


    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 person’s enjoyment of the
    good prevents other people from enjoying the same
    unit of the good.

    Copyright © 2004 South-Western


    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.

    Copyright © 2004 South-Western


    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.

    Copyright © 2004 South-Western

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