eco1104 - Public Goods & Common Resources

Excludable

a G/S that cannot be used by people who have not paid for it

Rival in Consumption (Rival)

one person’s consumption of a good prevents/decreases the ability of others to consume it

Rhino horns are

a rival good

A song on the radio

a non-rival good

Private Goods

G that are both excludable & rival

4 Categories of Goods

1) Private Goods
2) Public Goods
3) Common Resources
4) Artificially Scarce Goods

Private Goods

goods that are BOTH excludable and rival

- E.g. plane tickets, pizza, minivans

Public Goods

goods that are NEITHER excludable nor rival

- E.g. open-source software, traffic lights, national defence

Common Resources

goods that are NOT excludable, but ARE rival

E.g. forests, fisheries, wildlife

Artificially Scarce Goods

goods that ARE excludable, but NOT rival

○ Functions like natural monopolies

Free-Rider Problem

a problem that occurs when the non-excludability of a public good leads to undersupply

e.g. when people get onto a public bus without paying

What happens to market & equilibrium when the free-rider problem exists?

EQ falls below the level that would maximize TS in society as a whole

Results in market failure

"When a good is non-easily excludable, what people pay for it will not necessarily reflect the ___ ___ they place on it"

real value

3 Solutions to the Free-Rider Problem

1) Social Norms (expectations from community)
2) Government Provision
3) Private Property Rights

Marginal Social Benefit: Definition

sum of marginal benefit gained by each individual user

Where is the efficient quantity when the government is supplying a public good?

Marginal Social Benefit = Cost

Why might individual rational behaviour be socially inefficient?

each individual has an incentive to overstate the marginal benefit received b/c they don't pay for them (government does)

Assigning Property Rights

To combat the free-rider problem, make a public good more like a private good (make a public good excludable)

Tragedy of the Commons

the depletion of a common resource due to individually rational but collectively inefficient overconsumption

What happens to the equilibrium of common resources/tragedy of the commons?

s inefficiently high demand & dwindling Q

3 Solutions to the Tragedy of the Commons:

1) Social Norms
2) Government Regulation (bans & quotas)
3) Private Property Rights (privatization, tradable allowances, permits)

Public goods & common resources are sources of

market failure

Unregulated public goods encounter

free-rider problem

■ Non-excludability cause undersupply

Unregulated common-resource goods encounter

tragedy of the commons

■ Non-excludability & rivalry combined cause over-consumption & depletion of the resource