Public Goods and Common Resources

The chapter explores public goods and common resources, stating that many valuable goods are available free of charge.
Public goods and common resources present unique challenges for economic analysis since they lack market prices.
Effective resource allocation usually occurs through markets; however, for public goods and common resources, market forces often fail.
Government intervention may improve outcomes in these cases.

Excludability: The property of a good whereby individuals can be prevented from using it.
Rivalry in Consumption: The property of a good whereby one person's use diminishes other people's use.

Private Goods:
- Characteristics: Excludable and rival in consumption.
- Example: Ice-cream cones (one person eating it prevents another from eating the same cone).
- Most goods in the economy fall under this category.
Public Goods:
- Characteristics: Neither excludable nor rival in consumption.
- Example: Tornado sirens or national defense (one person's enjoyment does not reduce another's).
Common Resources:
- Characteristics: Rival in consumption but not excludable.
- Example: Fish in the ocean (one person catching fish reduces availability for others).
Club Goods:
- Characteristics: Excludable but not rival in consumption.
- Example: Fire protection in a small town (can exclude users, but protection of one home does not limit others).

The distinction between these categories is sometimes fuzzy and depends on circumstances.
Many goods are subject to externalities, affecting their allocation, which leads to market failure.

Public goods create a unique issue because they cannot be excluded from users, leading to the free-rider problem.
Free Rider: A person who receives the benefit of a good but avoids paying for it.

Citizens of Smalltown value seeing fireworks at $10 each, creating a total benefit of $5000 for 500 residents.
The cost of the fireworks display is $1000; hence, it leads to a socially desirable outcome if provided.
Private entrepreneurs struggle to sell tickets because people can enjoy fireworks for free, leading to a misallocation of resources.

The local government can intervene by taxing residents $2 each to fund the display, aligning with residents' total benefit ($8 net gain per person).
This highlights the government’s role in providing public goods that the market fails to supply efficiently.

National Defense:
- Defending a country is a public good; once provided, it benefits everyone without exclusion.
- In 2014, the U.S. spent $748 billion on national defense, approximately $2,346 per person.
Basic Research:
- General knowledge is a public good as it cannot be patented (everyone can use it without charge).
- Government funding promotes research at institutions like the NIH and NSF for societal benefits.
Fighting Poverty:
- Programs like TANF and SNAP can be considered public goods aimed at reducing poverty, addressing free-rider behavior and promoting collective welfare.
- Government can help eliminate poverty through tax-funded programs, benefiting all society through the improved living standards of the poor.

Lighthouses illustrate a transition from public to private goods based on usage.
Economists have historically viewed lighthouses as public goods due to their benefits being non-excludable and non-rival.
However, in some cases, lighthouses were privately owned and operated, showing flexibility in classification.

The government must conduct cost-benefit analyses to determine the efficiency of public goods provided=.
This involves estimating total costs and benefits, considering the difficulty of quantifying public good value without price signals.

Total earnings of a person if they lived.
The marginal value based on risks individuals are willing to take and associated monetary compensations.
Current estimates value a human life at around $10 million, which helps in making informed economic decisions regarding public investments.

Common resources are non-excludable, available without charge, but rival in consumption, leading to overuse.
Tragedy of the Commons: A scenario illustrating how individual use leads to depletion from collective resource failure.

Medieval town sheep example shows how rational behavior (each shepherd increases flock size) leads to collective irrationality and resource depletion.
Solutions to prevent tragedy: regulate flock sizes, internalize costs with taxes, or privatize grazing land into ownerships.

Clean Air and Water:
- Pollution exemplifies negative externalities affecting common resources, requiring government regulation and corrective taxes.
Congested Roads:
- Notably, roads can transition between being public goods (uncongested) and common resources (congested).
- Implementing toll charges during high traffic can reduce congestion.
Fisheries and Wildlife:
- Fish populations exemplify overuse of common resources, necessitating government regulations for sustainable practices, such as licenses and quotas.

The market fails to allocate resources efficiently without well-established property rights, leading to issues like pollution and underprovided goods.
Government intervention can help define property rights or regulate behaviors to enhance resource allocation and raise economic well-being.

Goods Classification: Differentiated by excludability and rivalry in consumption. Each type has distinct implications for how they can be efficiently provided.
Public Goods: Not rival, not excludable. Incentives for free-riding necessitate government provision.
Common Resources: Rival but not excludable. Overuse leads to excessive consumption issues, requiring government regulation.
Understanding these concepts is key for analyzing public policy compliance and addressing market failures effectively.