Public Goods and Common
Resources
Types of Goods
• Excludability
– Property of a good/service
– Means I can stop someone from using it
• Rivalry
– Property of a good/service
– Means if I use it, it takes away from someone
else’s ability to use it
Types of Goods
Rival in Consumption?
Yes
Yes
No
Private Goods
Natural Monopolies
Examples
-Ice Cream
-Clothing
Examples
-Fire Protection
-Cable TV
Common Resource
Public Goods
Examples
-Fish in the Ocean
-The Environment
Examples
-National Defense
-Tornado Warning System
Excludable?
No
• Private Goods
– Excludable and Rival in consumption
• Public Goods
– Non Excludable and Non Rival in consumption
• Common Resources
– Non Excludable but Rival in consumption
• Natural Monopolies
– Excludable but Non Rival in consumption
• Private Goods
– No problem, we have markets
• Natural Monopolies
– Maybe regulate the monopoly, but not big
problem
• Public Goods and Common Resources
– Non Excludable (cant stop someone from using)
– So no price can be attached to it, don’t have to
pay
– No market will form, so government has to find a
remedy
– Externalities
Public Goods
• Free Rider Problem
– People will enjoy the service but wont pay for it,
they’re just getting a free ride
– So private market will not supply good
• Government can fix this by providing the
good/service and taxing to pay for it
– If total benefits are greater than total cost then
the government should provide it and welfare will
improve
• Positive Externality
Important Public Goods Provided By
the Government
• National Defense
• Basic Research
• Fighting Poverty
Cost verses Benefits
• If the government is going to supply the public
good must first decide whether to or not and
then how much.
• Benefits must outweigh Costs
– But there is no market so no price signals
– How do we measure benefits when humans are
concerned?
Example: Public Good
• Do we put a median between two streets?
• Costs
– The cost of the cement/workers…….
• Benefits
– Lower average traffic wrecks and less lives lost
• How to measure this benefit
– How do you put a price on a life?
– Use hazardous pay to estimate maybe
• If Benefits > Costs then put up median
Common Resources
• Common Resources
– Non Excludable but Rival in Consumption
• Tragedy of the Commons
– Common resource get overused
– Private incentive and Social incentive diverge
– My usage may be good for me (private) but bad
for the overall efficiency
– Because my usage diminishes everyone else’s take
• Negative Externality
Example of Tragedy of the Commons: Fishing
# of Boats
Catch Per Boat
Total Catch
1
10
10
2
10
20
3
9
27
4
8
32
5
7
35
6
6
36*
7
5
35
8
4
32
9
3
27
Social Optimal: Overall
Catch is greatest (note
we are ignoring any
fishing cost for
simplicity sake)
Say at Optimal. I have one boat in the fleet, so my catch is 1 x 6 = 6. Now, if I add one
more boat my catch is 2 x 5 = 10, so my private incentive is to add another boat, but
this reduces the overall catch.
Same as if there are 8 boats each catching 4. If I have one boat my catch is 1 x 4 = 4.
Now if I add another boat I get 2 x 3 = 6, so my private incentive is to add another.
• Government should come in to fix the tragedy
• Has two types of options
– Regulate or tax the action or cap and trade
• Such as is done in fisheries, they limit boat numbers
and limit catches so overfishing is not done
– Turn it in to a private resource
• This gives the owner an incentive to maximize the
usage and so will stop the tragedy cause now it is in his
best interest
• This is being done in some African countries to promote
wildlife – The locals “own” the tigers/buffalo and can
sell rights to hunt, so have an incentive to preserve the
populations
Some Common Resources
• Clean Air and Water
• Congested roadways
• Wildlife – wild fish populations for example