ECON Lecture 10.2: Public Goods, Common Property, and Market Failure Notes

Overview of Public Goods and Market Failure

• Context within Economic Theory:

  • Public goods are a primary example of market failure, a concept previously defined in the introductory lecture materials.

  • The focus of Lecture 10.2 is to determine exactly what these goods are and why they cause the standard market system to fail.

Classifications of Goods

Economists use specific criteria to classify goods into three major categories. These definitions often differ from ordinary usage or political science definitions.

• Criteria 1: Rivalry in Consumption:

  • Rival: If one person consumes the good, there is less available for others (e.g., a car or a house).

  • Non-rival: One person's consumption does not reduce the amount available for others (e.g., a tornado siren broadcast).

• Criteria 2: Excludability:

  • Excludable: It is possible to prevent a non-paying customer from consuming the product (e.g., needing keys to drive a car).

  • Non-excludable: It is impossible or nearly impossible to prevent non-payers from consuming the benefit once the good is provided (e.g., hearing a siren or seeing a lighthouse beam).

Private Goods and Market Efficiency

• Definition: A private good is both rival in consumption and excludable.

• Characteristics:

  • These are the goods typically studied in standard supply and demand models (Chapter 4).

  • Examples: Cars, houses, clothing, food, and healthcare.

• Examples of Excludability Mechanisms:

  • Cars: You do not get the keys unless you pay.

  • Houses: Only one family can live in a house at a time (rivalry), and access is restricted to the owner/renter.

  • Clothing: Stores use cash registers, doors, and shoplifting laws to ensure payment.

• Economic Performance:

  • The market system uses pricing to allocate production.

  • Demand Curve: Measures the value people put on things.

  • Supply Curve: Measures the cost of production.

  • Allocative Efficiency: Occurs at the intersection where $D = S$. Because private goods are excludable, people bargain and pay the equilibrium price, resulting in the correct level of production. Private goods are not considered a market failure.

Public Goods and the Free-Rider Problem

• Definition: To an economist, a public good must be non-rival in consumption and non-excludable.

• Non-rivalry Explains:

  • Example: Tornado Sirens. Whether one person or $2,000$ people live in a neighborhood, they can all hear the siren simultaneously without reducing the benefit to others.

• Non-excludability Explains:

  • It is impossible to prevent a neighbor who hasn't paid from hearing a siren.

• The Problem: Underproduction:

  • No private business person will enter a market for public goods because they cannot exclude non-payers.

  • If a private company built a tornado siren and tried to charge the neighborhood, self-interested individuals would refuse to pay, knowing they can hear it for free once a neighbor pays for it.

  • The business would face losses and go bankrupt.

• The Free-Rider Definition:

  • A free-rider is someone who consumes a good but does not pay for it because they are self-interested and the good is non-excludable.

  • Metaphor: PBS/NPR: Many people enjoy the station but flip the channel or skip a check during the "pledge break." The instructor notes that in $30$ years of teaching, he has found almost no one in his face-to-face classes who has mailed a check to NPR, despite liking the content.

Detailed Case Study: The Lighthouse

• Geography and Scenario:

  • Key West Lighthouse: Now a tourist attraction, but historically critical.

  • Route: Sailing from Tampa Bay to Miami (approx. over $200$ miles).

  • Danger: Sailors often stay $50$ miles offshore where they cannot see the land. At night, they risk running aground on reefs.

  • Historical Context: Spanish galleons and ships like the captain of the "Black Pearl" (as seen in Johnny Depp movies) frequently wrecked in the Florida Keys, resulting in massive loss of life and property.

• Market Failure in Lighthouses:

  • If a private partnership built a lighthouse at the end of the Keys, they would have no mechanism to force passing ships to pay.

  • Once the light is on, every boat owner sees it and avoids the reef. Sailors reach Miami safely, but because of human self-interest, they fail to send a check to the lighthouse owner.

  • Solution: Since private companies would go bankrupt, the government provides the service by forcing payment through taxation.

Common Property and Overconsumption

• Definition: Common property (or common goods) is rival in consumption but non-excludable.

• Examples: Rivers, oceans, the atmosphere.

• The Problem: Overconsumption:

  • Example: Fishing in the Chattahoochee River: If one fisherman catches a fish, there is one less fish for others (rivalry). However, because no one "owns" the river, it is difficult to exclude people (non-excludability).

  • Behavioral Result: Self-interested individuals catch as many fish as possible for their own enjoyment, leading to the destruction of the river's fish population.

• Solution: Government Regulation:

  • The government acts as an "arbiter" of the common property.

  • Georgia Department of Fish and Wildlife: Employs officers with special jurisdiction to issue fishing licenses. These licenses limit the amount of fish an individual can take, effectively solving the non-excludability problem through regulation.

Government-Provided Goods vs. Economic Public Goods

It is a "failure of imagination" to assume that everything provided by the government is a public good. Many government-provided items are technically private goods.

• Goods Markets CAN Provide (Private Goods under Government Control):

  • Schools: Private schools like Emory or Kennesaw State University (KSU). They are excludable because the institution can withhold grades, transcripts, and classroom access if tuition is not paid.

  • Hospitals: Private hospitals exist and make money by turning away those who do not pay.

  • Interstate Highways: These can be made excludable through tolls (e.g., Florida Turnpike, New Jersey Turnpike, or the old Georgia 400). If a private individual like Donald Trump owned Georgia 400, he could make a fortune by charging tolls.

• Goods Markets CANNOT Provide (True Economic Public Goods):

  • National Defense: Example: A private Trident nuclear submarine. If a private entity (e.g., Donald Trump) patrolled the oceans, every citizen would be protected regardless of payment. People would free-ride, leading to the collapse of the private defense provider.

  • General Policing: Officers driving around to keep crime under control.

  • Flood Control Dams: You cannot choose to flood the basement of a non-payer while protecting the neighbor who paid. You either protect the whole downstream area or nobody.

Conclusion

• Private Markets: Handle private goods extremely well through bargaining and excludability.

• Government Role: Required to own, operate, or regulate public goods and common property because private markets will either underproduce them (public goods) or allow them to be overconsumed (common property).