Lecture 12: Public Goods and Common Resources

Excludability

Property of a good where a person can be prevented from using it

Rivalry in consumption

Property of a good where one person’s use diminishes other people’s use

• A good or service where one person's use prevents another person from consuming that same unit

Private Goods

Private goods, which make up the majority of goods and services in market economy

• Ex. smartphone and a car are private goods

• Goods are limited to those who pay for it, and one person's use of it prevents others from using the same unit 

Are private goods excluable and do they rival in consumption?

Private goods are excluable and rival in consumption

• Limited to those to pay for it and one person’s use excludes others

Public Goods

A good or a service that is both non-excludable (everyone can use it) and doesn’t rival in consumption (one person's use doesn't diminish its availability to others)

• Ex. Street lights and national defense

Are public goods excluable and do they rival in consumption?

Public goods are non excluable and don’t rival in consumption

Common Resources 

Good that rivals in consumption and non-excludable, meaning that one person's use of the resource reduces its availability for others, but no one can be effectively excluded from using it.

Ex. Fisheries, forests, oceans, and groundwater basins.

Are public goods excluable and do they rival in consumption?

Public goods are not excludable and don’t rival in consumption

Club goods

Goods that are both excludable and non-rivalrous, meaning access can be restricted but one person's use does not diminish the ability of others to use it

• Ex. Netflix and gyms

Do club goods rival in consumption and are they excludable?

Club goods are excluable and don’t rival in consumption

What kind of good is the Mona Lisa (looking at it online)?

Looking at the Mona Lisa online, it is non excluable (anyone can look at it) and it doesn’t rival in competition (one’s person use doesn’t diminish another person’s ability use it)

• Public good

How can goods be grouped?

Goods can be grouped into 4 categories, according to two characteristics

• Good is excluable if people can be prevented from using it

• Good rivals in consumption if one’s person use diminishes other person’s use of it

Public goods and common resources commonalities

Public goods and common resources aren’t excluable

• No one can be prevented from using it

• Available to everyone free of charge

• Have externalities: Public goods with a positive externality and common resources with negative externalities

Why do public goods have positive externalities? 

Public goods like national defense and a tornado siren have positive externalities, since they benefit third parties that don’t pay for them

Why do common resources have negative externalities?

Common resources, like fish in the ocean and groundwater have negative externalities, since their overuse harms others

Are private decisions with public goods and common resources efficient?

Private choices often cause inefficient resource use, but government action can improve overall economic well-being.

Free Rider

Person who recives the benefit of a good, but avoids paying for it

Why is free riding a problem?

Public goods, like tornado sirens and national defense aren’t excluable

• Prevents the private market from supplying the goods

• Market failure

How can the government fix the free rider problem?

If the total benefits of a public good exceeds its costs, the government can remedy the free rider problem by: 

• Providing the public good

• Paying for it with tax revenue

• Make everyone better off

How does the government decide what public goods to provide?

The government decides what what public goods to provide and in what quantities using cost benefit analysis

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

• Doesn’t have any price signals to observe

• Use rough approximations

A college campus has to decide whether to spend $40,000 to clear sidewalks of snow during the winter. There are 4,000 students. 1,000 of these students would be willing to pay up to $30 to walk on a snowless sidewalk. The other 3,000 are willing to pay $8 each.

a) In terms of efficiency, should the university pay $40,000 to keep snow off the sidewalks

• Yes, since the students are willing to pay more than it costs, (1000 × 30= 30,000 and 3000 × 8= 24,000). So the total benefit is 54,000 which is more than the cost of 40,000, so the school should pay for it

b) Suppose the college added a $10 fee to cover the $40,000 cost. What would happen if the decision to clear snow were put up for a vote.

• The 3,000 students who are only willing to pay $10 each, wouldn’t want to clear the sidewalks

• c) A university administrator proposes the following: The
  3,000 students willing to pay $8 must in fact pay $8 each.
  The students willing to pay $40 only have to pay $16 each
  Why might this policy not work in practice?

• The 1,000 students won’t want to pay more, people could lie about their WTP and enforcement is more difficult

What happens to common resources?

Common resources like groundwater and fish in ocean are non excluable, but rival in consumption

• Common resources are used more than desirable

• Has a negative externality

Why do common resources have a negative externality?

Common resources have a negative externality, since one person’s use diminishes other people’s enjoyment of it

• Common uses tend to be used excessively

• Governments can solve this problem, by adding regulation or taxes to reduce consumption of the common resource

• They can also turn the common resource into a private good

What is the negative externality for clean air and water as a common resource?

The negative externality is that overuse causes pollution, so regulations or corrective taxes are necesary

Why does the market for common resources fail to allocate resources efficiently?

Common resources are don’t allocate resources efficiently, since they are typically non-excludable, meaning they lack well-defined property rights.

• No one “owns” them, so people can use them without paying.

• Because users don’t bear the full cost of their consumption, overuse or depletion often occurs (negative externalities).

A stairwell in a certain office is congested. The congestion is so bad that people complain. The stairwell is what in terms of excludability and rival in consumption?

Can’t exclude people or prevent people from using it, so the stairwell is non- excluable. Rivals in consumption, since one person’s use prevents others from using it

• So it’s nonexcluable and rivals in consumption, so it’s a common resource

How would you reduce congestion in a staircase if it is a common resource?

Common resources have a negative externality, since one person’s use impacts others negatively

• A fee or “tax” internalizes the externality: it makes users pay for the cost their use imposes on others.

• Charge everyone who uses the stariwell the same fee. People who value it the most will use it 

What categories of goods are excluable?

Excludable= can prevent people from using it

We have private goods, common goods, club resources, and public goods

• Private goods and club resources are excluable

What categories of goods rival in consumption?

There are 4 types of goods: public goods, private goods, common resources, and club goods.

• Rival in consumption= one person’s use diminishes another person’s use of the good

Common resources and private goods rival in consumption

What is an example of a common resource?

Common resource: non excludable, but rival in consumption

• Fish in the ocean

Public goods are…?

Public goods: non excluable and don’t rival in consumption

• They are underprovided in the absence of a government

• Firms aren’t incentized to provide them, since people can use them without paying

Common resources are…?

Common resources= non excluable and rival in consumption

• They are overused in the absence of government, since indviduals ignorethe cost their use imposes on others