Public Goods & Resources (11)
Mr. Barnett
AP Microeconomics
University High School
Introduction
 We consume many goods without paying:
parks, national defense, clean air & water.
 When goods have no prices, the market
forces that normally allocate resources are
absent.
 The private market may fail to provide the
socially efficient quantity of such goods.
 One of the Ten Principles from Chapter 1:
Governments can sometimes
improve market outcomes.
Private vs Public
 A good is excludable if a person can be
prevented from using it.
Excludable: fish tacos, wireless
Internet access
Not excludable: FM radio signals,
national defense
 A good is rival in consumption if one
person’s use of it diminishes others’ use.
Rival: fish tacos
Not rival:
An MP3 file of Kanye West’s latest single
Private vs Public
 Pure public goods are nonrival, nonexcludable,
and nondivisible
 Free-Riders
 Since non-excludable, people enjoy good
without payment
 Private market produces less of the good
or service than is socially optimal (buyers
collectively value the good higher than the
cost of providing it).
Four Classifications
 Private – Rival & Excludable
 Common Resources – Rival but NOT Excludable
 Quasi-Public/Collective/Club Goods – NOT Rival &
Excludable
 Public Goods – NOT Rival & NOT Excludable
Question
A road is which of the four
kinds of goods?
Hint: The answer depends on
whether the road is congested
or not, and whether it’s a toll
road or not. Consider the
different cases.
Answer
 Rival in consumption? Only if congested.
 Excludable? Only if a toll road.
Four possibilities:
Uncongested non-toll road: public good
Uncongested toll road: club / quasi-public/collective good
Congested non-toll road: common resource
Congested toll road: private good
Cost-Benefit Analysis
 The difficult job of cost–benefit analysis
 Government
Decide what public goods to provide
What quantities
 Cost–benefit analysis
Compare the costs and benefits to society of
providing a public good
Doesn’t have any price signals to observe
Government findings
Rough approximations at best
How much is a life worth?
 Cost: $10,000 – new traffic light
 Benefit: increased safety
 Risk of a fatal traffic accident
 Drops from 1.6% to 1.1 %
 Obstacle
 Measure costs and benefits in the same units
 Put a dollar value on a human life?
 Priceless = infinite dollar value
9
How much is a life worth?
 Implicit dollar value of a human life
 Courts - award damages in wrongfuldeath suits
Total amount of money a person
would have earned if he or she had
lived
Ignores other opportunity costs of
losing one’s life
 Risks that people are voluntarily
willing to take and how much they
must be paid for taking them
Value of human life = $10 million
10
How much is a life worth?
 Cost-benefit analysis
 Traffic light
Reduces risk of fatality by
0.5 percentage points
 Expected benefit = 0.005 × $10
million = $50,000
 Cost ($10,000) < Benefit
($50,000)
 Approve the traffic light
11
Common Resources
 Like public goods, common resources
are not excludable.
 Cannot prevent free riders from using
 Little incentive for firms to provide
 Role for govt: seeing that they are
provided
 Additional problem with common
resources:
rival in consumption
 Each person’s use reduces others’ ability
to use
 Role for govt: ensuring they are not
overused
The Tragedy of the Commons
 A parable that illustrates why common resources get used
more than is socially desirable.
 Setting: medieval town where sheep graze on common
land.
 As the population grows, the # of sheep grows.
 The amount of land is fixed,
the grass begins to disappear from overgrazing.
 The private incentives (using the land for free) outweigh
the social incentives (using it carefully).
 Result: People can no longer raise sheep.
The Tragedy of the Commons
 The tragedy is due to an externality:
Allowing one’s flock to graze on the
common land reduces its quality for
other families.
 People neglect this external cost,
resulting in overuse of the land.
ACTIVE LEARNING
2
Policy options for common resources
What could the townspeople
(or their government)
have done to prevent the tragedy?
Try to think of two or three options.
ACTIVE LEARNING
Answers
2
 Impose a corrective tax on the use of the
land
to “internalize the externality.”
Example: hunting & fishing licenses,
entrance fees for congested national parks
 Regulate use of the land (the “command-andcontrol” approach).
 Auction off permits allowing use of the land.
 Divide the land, sell lots to individual families;
each family will have incentive not to
overgraze its own land.
Common Resources
 Some important common resources
 Fish, whales, and other wildlife
Oceans – least regulated common resource
Needs international cooperation
Difficult to enforce an agreement
Fishing and hunting licenses
Limits on fishing and hunting seasons
Limits on size of fish
Limits on quantity of animals killed
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Why the cow is not extinct
 Animals with commercial value that are
threatened with extinction
 Buffalo
 North America
 Hunting in 19th century
 Elephants
 African countries
 Hunting today
18
Why the cow is not extinct
 The cow
 Commercial value
 Species continues to thrive
 Cows - private good
 Ranches - privately owned
 Rancher - great effort to
maintain the cattle population on
his ranch
 Reaps the benefit
19
Why the cow is not extinct
 Elephant - common resource
 Poachers - numerous
 Strong incentive to kill elephants
 Government
 Illegal to kill elephants and sell ivory
 Hard to enforce laws
 Decreasing population of elephants
 Elephants – private good
 People can kill elephants on their own property
 Landowners - incentive to preserve the species
 Elephant populations have started to rise
20
Public Bads
 Opposite of public goods
Non-Rival & Nonexcludable
Provides disutility and
dissatisfaction – reduces
economic welfare when
consumed
Public waste & pollution
are examples
Efficiency issues
CONCLUSION
 Public goods tend to be under-provided, while
common resources tend to be over-consumed.
 These problems arise because property rights
are not well-established:
 Nobody owns the air, so no one can charge
polluters. Result: too much pollution.
 Nobody can charge people who benefit from
national defense. Result: too little defense.
 The gov’t can potentially solve these problems
(MARKET FAILURES) with appropriate policies.