Public Goods and Common
Property Resources
Chapter 11
Criteria Used To Classify
Different Kinds of Goods
• Excludability
• Property of a good
• A person can be prevented from using it
• Rivalry in consumption
• Property of a good
• One person’s use diminishes other people’s use
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1
Four types of goods
Rival in consumption?
Yes
Yes
Excludable?
No
No
Private goods
Natural monopolies
- Ice-cream cones
- Clothing
- Congested toll roads
- Fire protection
- Cable TV
- Uncongested toll roads
Common resources
Public goods
- Fish in the ocean
- The environment
- Congested nontoll roads
- Tornado system
- National defense
- Uncongested nontoll roads
Goods can be grouped into four categories according to two characteristics:
(1) A good is excludable if people can be prevented from using it.
(2) A good is rival in consumption if one person’s use of the good diminishes other
people’s use of it.
This diagram gives examples of goods in each category.
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Chpt. 11: Public Goods and
Common Property Resources
• Public goods & Common resources
• Not excludable
• People cannot be prevented from using them
• No price attached to it
• Positive externalities (external benefits)
• Negative externalities (external costs)
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Common Resources
• Some important common resources
– Clean air and water
– Congested roads
– Fish, whales, and other wildlife
5
Tradable Permits
A Property Rights Approach
• “Common” Property Problem
– No one “owns” the air/water; therefore no one benefits from
managing (pricing) its usage
• Solution is to assign the property right to one party and
allow them to trade its use in the marketplace
– Coase Theorem
Coase’s Theorem
• If property rights exist and transaction (bargaining) and
information costs are low
– Then parties will be able to bargain among themselves (without
government intervention) to obtain an efficient outcome
An Example of the Coase Theorem
• Marketplace
– Firm upstream from a farmer
• Firm produce a good valued by consumer but dumps pollutants into the
river as a byproduct
• Cost of using the river to the firm is $0
– Cost of pollution abatement equipment $3M
– Farmer
• Downstream from the firm
• Uses water to irrigate his agricultural products
• Pollution affects/degrades his product
– Crop damage estimate to be $8M
Assigning the Property Rights
• If assigned to the firm
– Farmer is willing to “bribe” the firm to reduce pollution
• Willing to pay firm to reduce gallons discharged up to marginal value of
crop damage due to pollution
• Firm: willing to accept payments that are >= marg costs of
treatment/reduction
– Farmer WTP ~ $8m
• Buy equipment for ~$3m
Growth rate (replacement) and size of the
fish stock/pool
• Too Small/Low Stock Size
– Lower growth rate as fish can’t hook up and reproduce
– Birth (replacement) less than death/harvest
• Growth rate declines; species becomes extinct
• Too Large Stock Size
– Food sources (plankton, biomass, other fish) too small to
support large # of fish
• Growth rate declines
Schaffer model: Relationship between the
Fish Population and Growth
3 Possible Solutions
• 1. Open (unregulated) Fisheries (Ec)
– Catch until total costs exceed revenues (up to zero profits) =>
ATC(Q) = TotRev(Q) = P*Q
• 2. Maximum Sustainable Yield(MSY) (Em)
– Largest “harvest” that can be sustained every year (harvest =
replacement rate)
– Biologist solution
• 3. Economically Efficient (Eo)
– Maximize Economic Value (MC(Q) = MR(Q)
How do we use this to manage the
fisheries (prevent extinction)
• Compare
– Open Access Fishery (Tragedy of the Commons)
• Everyone who has a boat can harvest as many fish as they can catch
profitably
– Maximum Sustainable Yield (MSY)
• What is the largest stock of fish that can be sustained from one year to
the next (harvest = growth rate at max stock size)
– Economically Efficient
• Given costs/benefits – what is the efficient harvest
FIGURE 14.2
Efficient Sustainable Yield for a Fishery
Policy Options
• Command and Control (Regulation)
– Set Quota for number of fish that can be caught
• Ignores differences in costs/efficiency of fishermen
• Can lead to over capacity (too many boats, too big)
• Discarded catch/by-catch issues
• Tradable permits (ITQs)
–
–
–
–
–
Determine optimal “harvest” and number of licenses to be issued
Divide quota/target by number of license = #fish caught per license
Auction or grandfather licenses
Allow owners to trade (one-year, or multi-year)
Multi-species/by-catch
• Taxes
– Per unit tax on the #fish caught
Individual Transferable Quotas (ITQs)
• An efficient quota system will have the following
characteristics:
– The quotas entitle the holder to catch a specified volume of a
specified type of fish.
– The total amount of fish authorized by the quotas should be
equal to the efficient catch level for that fishery.
– The quotas should be freely transferable among fishermen.
• Taxes also raise the real cost of fishing, but do so in an
efficient manner.
– Unlike regulations, the tax can lead to the static-efficient
sustainable yield allocation because the tax revenues represent
transfer costs and not real-resource costs.
– Transfer costs involve the transfer of resources from one part of
society to another.
– For the individual fisherman, however, a tax still represents an
increase in costs.
FIGURE 14.7 Effect of Regulation
TABLE 14.1 Countries with Individual
Transferable Quota Systems