Class 14: Public Goods

What are private goods?

Most goods we think about in economics are private goods

• 1. If I have something, I can prevent you from using it

• 2. If I consume it, you don’t get to consume it

What are some goods that not private goods? Non-rivalrous

Non-rivalrous good is if one person consumption does not reduce another person utility from consuming it

What are some goods that not private goods? Non-excludable

Non-excludable goos is if people can’t be prevented from consuming it

What type of good are ocean fishery and why?

They are rivalrous and non-excludable, because they are rivalrous over fishing reduces the utility of the next fishermen, and non-excludable, because you can’t really enforce, or exclude people from the oceans

What type of good are fireworks display?

Non-rivalrous and non-exludable, because anyone can watch a firework blow up in the sky without ruining it for other people, and it impossible to exlude people from watching if your nearby

What are some examples of non-rivalrous and non-excludable goods

Noted

What is tragedy of the commons?

It occurs when common goods (rivalrous and non-excludable) become overused by people, leading to the degradation of a resource by a user imposes a negative externality on other users. Left unregulated, users will overuse the resource relative to the socially optimal level

How many boats maximize welfare from the fishery?

Set marginal benefit (MB) = Marginal Social Cost (MSC)

MB = MSC

MB = P x Q

MB = 5 (5000 - 20N) = 25,000 - 100N

MPC = 10,000

MEC = N(20 (Change in catch) 5 ($/lb)) = 100N

MSC = 10,000 + 100N

MSC = MB

10,000 + 100N = 25,000 - 100N

200N = 15,000

How many boats will if the market is perfectly competitive?

Profit = TR - TC = MB - MPC

MB = 25,000 - 100N - MPC = 10,000

-100N = -15,000

N = 150

Why do we refer to this outcome as the “tragedy of

the commons”?

This is tragedy of the commons, because each boat owners cares about the profits there own, and don’t care about the externality they impose on others fishers. Resulting in private action overusing or deplete common resources

How can we solve the tragedy of the commons?

1. Governments could levy a Pigouivan tax each boat, and thus providing a barrier of entry into the market and reducing the amount of fishery entering the market

2. An alternative approach is to encourage firms to jointly manage the resource as a cooperative

How can a Pigouvian tax solve the tragedy of the commons?

Previous problem: N^* = 75

MEC = 100N

Recall that the optimal pigouvian tax is set equal to Marginal External Cost (MEC) at socially optimal quantity

t (pigouvian tax) = MEC(socially optimal quantity)

t = 100(75)

t = $7,500

How does the tax impact the size of the competitive fishing fleet?

Profit = TR - TC

N^* = 75

25,000 - 100N - 10,000 (MPC) - 7,500 (Externality) = 0

7,500 = 100N

N = 75

How can a cooperative solve the tragedy of the commons?

Working progreress

Public goods and market failure

Public goods are non-excludable and rivalrous

• Mnay people can use and enjoy them without reducing their value

• Ex - National defense, fireworks, lighthouses

What market failure occurs under public goods

Under public goods each person that contributes to the public goods generates a large positive externality that many people can enjoy regardless of contributions

This leads too little of the public good being provided, and economists refer to this as free-rider problem

Note - Look at the image

No, because each roommate values there time at $16 / hour and individual value of cleaning is P = 12 - H

Would the roommates sufficiently value cleaning collectively to justify cleaning?

Yes, because if you combine the 4 roommates to clean for one hour.

4 P(1) = 12 - 1 = 11(4) = $44 of values vs $16

MPB = 12 - H

MSB = 4 (12 - H)

The $44 value collectively makes sense instead of $11 for each roommate, because they all collectively benefits from clean apartment and which is $44 value

How many hours of cleaning maximize welfare?

MSB = MC

MSB = 48 - 4H

MC = 16

48 - 4H = 16

32 = 4H

H = 8

Just like a rivalrous good, welfare is maximized where the marginal benefits to society are equal to marginal cost

Why is welfare at that point?

The welfare is ½(8)(32), because welfare is any point at, or below Social Demand Curve, and private value of time

How do policymakers solve the free-rider problem

for public goods? Here, there are two sources of market failure.

1. Because the good is non-rivalrous, contributions create a positive externality.

2. Because the good is non-excludable, you canʼt force a person to pay for it.

So how might we solve the free-rider problem?

1. Public provision - some goods are provided by the government and paid for by

taxes (e.g., City of Davis firework displays, national defense).

2. Private provision - some firms provide public goods and fund them through

advertising or donations (e.g., Wikipedia, NPR, etc.), compelling contributions

through exclusive content or by increasing the social pressure to contribute.