In-Depth Notes on Public Goods and Common Resources

Introduction to Public Goods and Common Resources

• Many goods can be consumed without payment, such as parks, mountains, and lakes.
• Market forces typically allocate resources; however, they fail to provide these goods effectively.
• Governments can sometimes improve market outcomes.

Key Concepts

• Excludability: The ability to prevent individuals from using a good.

  • Excludable Goods: Fish in a private pond, tacos.
  • Not Excludable Goods: Fish in the ocean, public parks.

• Rivalry in Consumption: One individual’s consumption of a good reduces another’s ability to consume it.

  • Rival Goods: Fish tacos, oversold concert tickets.
  • Not Rival Goods: An uncongested road.

Types of Goods

• Private Goods: Excludable and rival in consumption (e.g., pizza).
• Public Goods: Not excludable and not rival (e.g., national defense).
• Common Resources: Not excludable and rival (e.g., deer in a forest).
• Club Goods: Excludable but not rival (e.g., cable TV).

Examples of Goods

1. Fish in Private Pond:
   • Rival, Excludable → Private Good
2. Fish in the Ocean:
   • Rival, Not Excludable → Common Resource
3. Specific Research for a Patent:
   • Rival, Excludable → Private Good
4. Basic Research on Lifestyle:
   • Not Rival, Not Excludable → Public Good
5. Congested Toll Road:
   • Rival, Excludable → Private Good (if congested)
6. Uncongested Toll Road:
   • Not Rival, Excludable → Club Good

Free-Rider Problem

• A free rider is someone who benefits from a good without paying.
• The Free-Rider Problem: Public goods are not excludable, leading to under-provision by the private market, resulting in market failure.

Role of Government

• Governments can improve resource allocation by:
  • Providing public goods where total benefits exceed costs.
  • Using tax revenues to fund these goods.
  • However, measuring the benefits can be challenging.

Significant Public Goods

• National defense is a critical public good, substantial in cost (e.g., $886 billion in 2020).
• Basic research is important but hard to quantify in benefits.
• Fighting poverty programs include TANF (temporary assistance), SNAP (food subsidies), EITC (tax rebates).

Cost–Benefit Analysis

• This analysis evaluates the total costs and benefits to determine public good provisions effective for society.
• While difficult to measure accurately, it guides government decisions regarding quantities of public goods supplied to address market inefficiencies.

Common Resources and The Tragedy of the Commons

• Common resources are vulnerable to overuse since they are not excludable but rival in consumption.
• Tragedy of the Commons: A parable illustrating the overuse of a shared resource leading to depletion (e.g., overgrazing in a medieval society).

Solutions to the Tragedy of the Commons

• Regulations to limit use, taxes to internalize external costs, auctioning permits, or privatizing resources can be viable solutions.

Important Common Resources

• Clean air and water are often degraded through pollution.
• Congested roads are common resources impacted negatively by congestion.
• Natural resources like fish and wildlife often require international cooperation for regulation.

Property Rights and Government Action

• Efficient resource allocation fails when resources have no price due to poorly defined property rights.
• The government can clarify rights, regulate activities, and fund goods not provided by the market.

Summary Points

• The classification of goods based on excludability and rivalry:
  • Good is excludable if it's possible to prevent use.
  • Good is rival if one person’s use decreases another's ability to use it.
• Private goods have an efficient market, while other types like public and common goods pose market challenges.
• Governments can help provide public goods and regulate common resources to limit overuse, using approaches like corrective taxes and regulations.