Microeconomics: Public Goods and Common Resources Notes

Introduction to Microeconomics: Public Goods and Common Resources

ECO1104 - Cristina Blanco-Perez, University of Ottawa

Characteristics of Goods

  • Market Failures: Competitive markets can fail for certain types of goods.
    • Common Resources: Overconsumed due to non-excludability.
    • Public Goods: Undersupplied due to non-excludability.
  • Key Characteristics:
    • Excludability: Ability of sellers to prevent non-payers from using the good.
    • Rivalry: One person's use diminishes the ability of others to use it.
  • Categories of Goods:
    • Private Goods:
      • Examples: Plane tickets, pizza, minivans
    • Common Resources:
      • Examples: Forests, fisheries, wildlife
    • Artificially Scarce Goods:
      • Examples: MP3s, pay-per-view movies, subscription-only websites
    • Public Goods:
      • Examples: Open-source software, traffic lights, national defense

Free-Rider Problem

  • Definition: The phenomenon where individuals benefit from goods without contributing to their cost (free-riding).
  • Examples: Public transportation, team projects, public health measures (e.g., vaccinations).
  • Consequences: Undersupply of public goods due to reduced funding, decreasing overall social surplus.

Tragedy of the Commons

  • Overview: A situation in which individuals consume a shared resource to the point of depletion due to the good being non-excludable and rival.
  • Impacts: Increased demand without payment leads to overconsumption and eventual depletion of resources (e.g., wildlife, fish stocks).
  • Characteristics:
    • Individually rational behavior that leads to collectively inefficient outcomes.
    • Associated with negative externalities where consumption exceeds the optimal level for social surplus.

Solutions to Public Goods and Common Resources

  • Market Failures Solutions: Which can be categorized into three approaches:

    1. Social Norms:
      • Encourage community behavior to reduce overconsumption and promote good practices (e.g., no littering).
    2. Government Regulation:
      • Implement bans and quotas to limit usage (e.g., fishing limits, pollution caps).
    • Challenges: Difficulty of enforcement and monitoring can reduce effectiveness.
    • Government provision to supply public goods at a level where marginal social benefit equals marginal social cost.
    • Difficulties: Estimating marginal social benefits and deciding on funding sources.
    1. Property Rights:
      • Assigning ownership can help manage common resources effectively.
      • Example: Patents protect innovations from free-riding.

Summary of Key Concepts

  • Types of Goods:
    • Excludable & Rival: Private goods
    • Non-excludable & Non-rival: Public goods
    • Rival & Non-excludable: Common resources
    • Excludable & Non-rival: Artificially scarce goods
  • Market Functionality:
    • Efficient for private goods but struggles with public and common resources due to free-rider issues and tragedy of the commons.
  • Social Norms, Government Intervention, and Property Rights:
    • Each offers different strategies for improving the management and allocation of public goods/resources.
    • Challenges arise in implementation and effectiveness of these strategies.

References

  • Karlan, D., Morduch, J., Startz, M.L., Wong, A., (2017). Microeconomics. Chapter 19. McGraw-Hill.