ec 101 - midterm 2 (ch 11)

What is an excludability?

The property of a good where a person can be prevented from using it

What is rivalry in consumption?

When one person’s use of a good diminishes others’ ability to use it

What are private goods?

Excludable and rival in consumption

What are public goods?

Not excludable and not rival in consumption

What are common resources?

Not excludable but rival in consumption

What are club goods?

Excludable but not rival, a type of natural monopoly

Why do public goods and common resources create externalities?

Public goods create positive externalities, common resources create negative externalities

Why can private decisions lead to inefficiency with public and common goods?

Because no price is attached, individuals don’t consider external effects

How can government intervention help with inefficiency amongst public and common goods?

By imposing allocation and correcting market failures

What is a free rider?

Someone who benefits from a good without paying for it

Why does the free-rider problem causes market failure?

Public goods are not excludable, so private markets won’t supply them

When should the government provide a public good?

When total benefits exceed total costs

How does the government fund public goods?

Through tax revenue

Why is national defense a public good?

It is non-excludable, non-rival, and extremely costly

Why is basic research a public good?

Knowledge spreads freely and benefits society broadly

What anti poverty programs are public goods?

TANF, SNAP, and housing assistance programs

Why are lighthouses typically considered public goods?

Ships benefit without paying; usage is non-rival and non-excludable

How were some lighthouses privately operated historically?

Owners charged nearby port owners, if unpaid, they turned off the light

How do we determine if something is a public good?

Identify beneficiaries and wether they can be excluded

Why is cost-benefit analysis difficult for public goods?

No market prices exist to measure value

What is the challenge in valuing human life?

Benefits must be measured in dollars, but life is priceless!

What is the estimated implicit value of a human life used in policy?

$10M

Should a $10,000 traffic light be installed if it reduces fatality risk by 0.5%?

Yes, expected benefit is $50,000 which exceeds cost

What are common resources?

Goods that are rival but not excludable

What is the tragedy of the commons?

Overuse of a common resource due to individual incentives ignoring social costs

Why does the tragedy of the commons occur?

Each use imposes a negative externality on others

How can government address overuse of common resources?

Regulation, taxes, or converting the rescue into a private good

Why are clean air and water common resources?

They are non-excludable but rival due to pollution

How can government reduce pollution?

Regulations or corrective taxes

Why are congested roads common resources?

Non-excludable but rival during peak times

What is a corrective tax for congestion?

Tolls or gas taxes

Why are fish and wildlife common resources?

Open-access oceans make exclusion difficult; overuse is common

What polices help preserve wildlife?

Licenses, quotas, size limits, and hunting/fishing seasons

Why are cows not endangered?

They are private goods; ranchers have incentives to maintain populations

Why are elephants endangered in some countries?

They are common resources; poachers overexploit them

How did some African countries protect elephants?

By making elephants private property, giving landowners incentives to conserve them

Why do markets fail when property rights are unclear?

No one has authority to control or protect the resource

How can government fix property rights issues?

Define rights

Regulate behavior

Supply goods directly