Ch 11: Public Goods and Common Resources

Chapter 11: Public Goods and Common Resources (Lecture 11.1 & 11.2)

Introduction to Market Failures in the Public Sector

  • This chapter focuses on specific problems within market systems: public goods and common resources.

  • These issues highlight what the government can effectively do to intervene and improve market outcomes.

  • Many goods are consumed without direct payment (e.g., national defense, parks, clean air, water).

  • When goods lack prices, normal market forces (supply and demand) for resource allocation are absent.

  • Without a pricing mechanism, private markets fail to provide these goods in socially efficient quantities, necessitating government intervention.

Characteristics of Goods

  • To understand why certain goods pose problems for markets, we categorize them based on two main attributes:

    1. Excludability

    2. Rivalry in Consumption

Excludability

  • Definition: A good is excludable if a person can be prevented from using it.

    • Conversely, a good is nonexcludable if a person cannot be prevented from using it.

  • Examples of Excludable Goods (Seller can prevent non-payers from using):

    • Fish Tacos: A taco truck can withhold a taco if payment is refused.

    • Wireless Internet Access: Providers (e.g., AT&T) can cut off service for non-payment.

    • Restaurant Food, Clothing, Vending Machine Sodas: Sellers have mechanisms to prevent consumption without payment.

    • College Lectures: Access to course materials (e.g., D2L) can be revoked for unpaid tuition.

  • Examples of Nonexcludable Goods (No mechanism to withhold from non-payers):

    • FM Radio Signal: Broadcasters (e.g., NPR) cannot prevent individuals from listening, even if they don't contribute during pledge drives, because the signal is broadcast to everyone simultaneously.

  • Implication: Most goods are excludable, providing a mechanism for sellers to collect payment. Nonexcludable goods pose a significant problem for private businesses trying to generate revenue.

Rivalry in Consumption

  • Definition: A good is rival in consumption if one person's use of it diminishes other people's ability to use the good.

    • Conversely, a good is nonrival in consumption if one person's consumption does not diminish the amount available for others.

  • Examples of Rival Goods (One person's use reduces availability for others):

    • Fish Tacos: If one person eats a taco, there's one less available for others.

    • Clothing: If one person wears a piece of clothing, another cannot wear the exact same physical item simultaneously.

    • Most Goods: Since goods are made of finite resources, one person's consumption typically reduces the amount available for others.

  • Examples of Nonrival Goods (One person's use does not affect others' availability):

    • Fourth of July Fireworks Display: Multiple people can watch the same fireworks display simultaneously without diminishing the experience for others (within viewing distance).

    • Tornado Siren: Many people can hear the same siren simultaneously; one person hearing it does not prevent others from hearing it.

  • Implication: Very few goods are nonrival. If a good is both nonexcludable and nonrival, it creates extreme difficulties for private businesses.

Categorizing Goods: The Two-by-Two Matrix

  • This matrix classifies goods based on their excludability and rivalry characteristics:

Rival in Consumption (YES)

Nonrival in Consumption (NO)

Excludable (YES)

Private Goods

Natural Monopolies

Nonexcludable (NO)

Common Resources

Public Goods

1. Private Goods

  • Characteristics: Both excludable and rival in consumption.

  • Explanation: These are the typical goods we discuss in market economics.

  • Examples:

    • Automobiles: When you buy a car, it's removed from the lot (rival), and the dealer can prevent non-payers from taking it (excludable, e.g., repossession for non-payment).

    • Food (e.g., Fish Tacos): Clearly excludable and rival.

  • Market Function: Private markets are highly effective at allocating private goods efficiently through pricing mechanisms.

2. Public Goods

  • Characteristics: Both nonexcludable and nonrival in consumption.

  • Explanation: These goods are available to everyone and one person's use doesn't diminish another's.

  • Examples:

    • Tornado Sirens: Nonrival (everyone within earshot hears it) and nonexcludable (no way to prevent a specific individual from hearing).

    • National Defense, Fireworks Displays, Basic Research, Fighting Poverty, Parks (without congestion), Clean Air/Water (to a degree).

  • The Free-Rider Problem:

    • Definition: A free rider is a person who receives the benefit of a good but avoids paying for it.

    • Cause: This problem arises fundamentally from the nonexcludability of the good, not from criminal activity. Individuals can consume the good without paying, and there's no mechanism to stop them.

    • Result: Private markets struggle to provide public goods because firms cannot compel payment. If a business tried to sell a public good, most customers would free-ride, leading the business to bankruptcy. Consequently, such goods are often not produced at all, even if their collective value to society exceeds the cost of provision.

  • Government's Role in Providing Public Goods:

    • If the aggregate benefit of a public good exceeds its cost, efficiency dictates it should be produced.

    • Since voluntary private mechanisms fail, the government must provide the good and fund it through mandatory taxation (forcible payment).

    • Challenge: Measuring the true benefit of a public good is difficult due to nonexcludability. People have no incentive to reveal their true willingness to pay if they can get it for free.

    • Cost-Benefit Analysis: Economists attempt to compare the costs and benefits of providing a public good through studies, but this is imprecise due to subjective individual valuations and the inability to directly observe willingness to pay (unlike in private markets).

3. Common Resources

  • Characteristics: Nonexcludable but rival in consumption.

  • Explanation: These resources are open to everyone, but one person's consumption diminishes the availability for others.

  • Examples:

    • Fish in the Ocean/Lakes (e.g., Lake Lanier): No one owns the open ocean/lake, making fish nonexcludable. However, one person catching fish reduces the total available for others (rival).

    • Congested Roads/Interstates: Anyone can use them (nonexcludable), but heavy traffic reduces the usefulness and increases travel time for everyone (rival).

    • Clean Air and Water (when polluted): The ability to discharge pollutants is nonexcludable, but one's pollution diminishes the quality of air/water for others (rival).

    • Wildlife (e.g., Deer, Whales): Hunters cannot be fully excluded from accessing certain populations, but each animal hunted reduces the population available for others (rival).

    • **Grazing Land (Historical