CH 11 - Study Notes on Public Goods and Common Resources

Public Goods and Common Resources

Introduction

  • Many goods are consumed without direct payment. Common examples include:

    • Parks

    • Mountains

    • Lakes

    • Clean air

  • These goods do not have prices, indicating that normal market forces which allocate resources are absent.

  • Private markets are unable to ensure the efficient allocation and usage of these goods for maximum societal benefit.

  • The role of governments is emphasized: "Governments can sometimes improve market outcomes."

Characteristics of Goods

  • Excludability

    • Definition: The ability to prevent people from using a good.

    • Examples:

    • Excludable: Fish in a private pond, tacos.

    • Not Excludable: Fish in the international ocean, national defense.

  • Rivalry in consumption

    • Definition: When one person's use of a good decreases another person's ability to use it.

    • Examples:

    • Rival: Tacos, laptop computers.

    • Not Rival: Uncongested road.

The Different Kinds of Goods

  • Private Goods:

    • Description: Goods that are both excludable and rival in consumption.

    • Example: Pizza.

  • Public Goods:

    • Description: Goods that are neither excludable nor rival in consumption.

    • Example: National defense.

  • Common Resources:

    • Description: Goods that are not excludable but are rival in consumption.

    • Example: Fish in international waters.

  • Club Goods:

    • Description: Goods that are excludable but not rival in consumption.

    • Example: Netflix subscription.

Examples of Different Kinds of Goods

  1. Fish in private pond:

    • Type: Rival, excludable

    • Classification: Private good

  2. Fish in the ocean:

    • Type: Rival, not excludable

    • Classification: Common resource

  3. Research on a cholesterol-lowering drug (patent obtainable):

    • Type: Not rival, excludable

    • Classification: Club good

  4. Basic research on lifestyle and cholesterol levels:

    • Type: Not rival, not excludable

    • Classification: Public good

Active Learning - Categorizing Roads

  • Question: What type of good is a road?

  • Hint: The answer depends on whether it is congested or not and if it is a toll road.

Active Learning Answers

  • Rival in consumption: Yes, only if congested.

  • Excludable: Yes, only if it is a toll road.

Four Possibilities:

  1. Uncongested non-toll road: Public good

  2. Uncongested toll road: Club good

  3. Congested non-toll road: Common resource

  4. Congested toll road: Private good

Public Goods and Free Riders

  • Free Rider: A person who benefits from a good without paying for it.

  • The Free-Rider Problem:

    • Notable Characteristics:

    • Public goods are not excludable, leading people to have incentives to be free riders.

    • This behavior prevents private markets from supplying adequate goods, indicating market failure.

Active Learning - Building a Fountain

  • Scenario: Neighbors (200 people) value a water fountain at $100 each; construction cost is $7,000. Only $3,000 is collected.

    • A. Should the fountain be built?

    • Answer: YES, because total benefits ($20,000) exceed costs ($7,000).

    • B. What happened? Will the fountain be built?

    • The fountain won't be built due to the free-rider problem.

    • C. Can the government help? How?

    • The government could tax each neighbor $35 to generate the funds required.

Public Goods

  • The government's role in addressing the free-rider problem involves:

    • Providing public goods when total benefits exceed costs.

    • Financing through tax revenue to allow improvement of overall societal wealth.

    • Challenges: Measuring benefits can be complex.

Some Important Public Goods

  1. National Defense:

    • Classification: Public good

    • Cost: $886 billion in 2020

  2. Basic Research:

    • Nature: Knowledge enhancement that often needs government subsidization.

    • Challenges: Measuring benefits can be difficult; often politically driven rather than science-driven.

  3. Fighting Poverty:

    • Temporary Assistance for Needy Families (TANF): Provides temporary income support.

    • Supplemental Nutrition Assistance Program (SNAP): Subsidizes food for low-income households.

    • Earned Income Tax Credit (EITC): Tax rebates for low-wage workers.

The Difficult Job of Cost–Benefit Analysis

  • Cost-Benefit Analysis:

    • Definition: A study comparing societal costs and benefits of public goods.

    • Implications: Estimates must rely on rough approximations; price signals are generally absent in such analyses.

Common Resources

  • Characteristics:

    • Not excludable: Free-riders are prevalent, reducing incentives for firms to provide.

    • Rival in consumption: Excessive usage by one party impacts remaining users.

  • Governmental role includes regulation to mitigate overuse.

The Tragedy of the Commons

  • Defined as a scenario exhibiting increased overuse of common resources, leading to social detriment.

  • Historical Reference: Sheep grazing in a medieval town

    • Result: Overpopulation and overgrazing deplete land.

  • The negative externality: Private benefits from free land usage conflict with social needs for sustainability.

Potential Solutions

  1. Regulate the number of sheep per family.

  2. Tax sheep usage to internalize externalities.

  3. Auction limited sheep-grazing permits.

  4. Convert common land to private property, dividing it among families.

Some Important Common Resources

  1. Clean Air and Water:

    • Issue: Pollution as a negative externality.

    • Regulations or corrective taxes can mitigate concerns.

  2. Congested Roads:

    • Challenge: Congestion impacting usage.

    • Solutions include tolls and adjusted gas taxes.

  3. Fish, Whales, and Wildlife:

    • Note: International cooperation is required for effective resource management.

    • Licensing and seasonal limits are examples of management techniques.

Congestion Pricing

  • Concept: Implementing higher tolls during peak travel can optimize resource use and improve welfare overall.

Property Rights and Government Action

  • Market inefficiency often results from poorly defined property rights.

  • Government actions can include:

    • Defining property rights.

    • Regulating private behavior.

    • Utilizing tax revenue to supply underprovided goods.

Summary of Goods Characteristics

  • Goods differ by excludability and rivalry.

    • Excludable: Possible to prevent use.

    • Rival in Consumption: One person's usage reduces availability for others.

  • Key Findings: Markets function best for private goods (excludable and rival) and perform poorly for public goods, common resources, and club goods.

Summary of Public Goods

  • Definition: Goods that are neither rival nor excludable.

  • Examples: Fireworks displays, national defense.

  • Free-rider issues inhibit private provisioning.

  • Government can facilitate resource allocation by determining public goods through cost-benefit analysis.

Summary of Common Resources

  • Definition: Goods that are rival but not excludable.

  • Examples: Common grazing land, clean air, congested roads.

  • Excessive usage due to lack of cost leads to negative externalities; government intervention includes regulations.