Public Goods and Common
Resources
Four types of goods
Goods can be grouped into four categories according to two
properties:
• Excludable – people can be prevented from using it.
• Rival in consumption – one person’s use of the good diminishes other people’s
use of it
Rival in consumption?
Yes
Excludable?
Private goods
Yes
No
Natural monopolies
- Ice-cream cones
- Clothing
- Congested toll roads
- Fire protection
- Cable TV
- Uncongested toll roads
Common resources
Public goods
No - Fish in the ocean
- The environment
- Congested nontoll roads
- Tornado system
- National defense
- Uncongested nontoll roads
Different Kinds of Goods
Types of goods
– Private goods
• Excludable & Rival in consumption
– Public goods
• Not excludable & Not rival in consumption
– Common resources
• Rival in consumption & Not excludable
– Natural monopoly
• Excludable & Not rival in consumption
Different Kinds of Goods
Public goods & Common resources
– Not excludable
– People cannot be prevented from using them
– No price attached to it
– Positive externalities
– Negative externalities
Public Goods
The free-rider problem
– Free rider: A person who receives the benefit
of a good but avoids paying for it
– Public goods are not excludable
• Free-rider problem prevents the private market
from supplying the goods
• Government can remedy the problem If total
benefits of a public good > its costs
– Provide the public good
– Pay for it with tax revenue
– Make everyone better off
Public Goods
Some important public goods
– National defense
• Very expensive public good
– Basic research
• General knowledge
– Fighting poverty
• Welfare system
• Food stamps
Are lighthouses public goods?
• Lighthouses mark specific locations so that
passing ships can avoid treacherous waters
• Benefit to the ship captain:
– Not excludable, not rival in consumption
• Incentive to free ride without paying
– Most are operated by the government
• In some cases
– Lighthouses are closer to private goods
• Coast of England, 19th century
– Lighthouses ware privately owned and operated
– The ship charged by the owner of the lighthouse
Are lighthouses public goods?
• Decide whether something is a public good
– Determine the beneficiaries
– Determine whether the beneficiaries can be
excluded from using the good
• A free-rider problem
– When the number of beneficiaries is large
– Exclusion of any one of them is impossible
Public Goods
Public Good, with no price, require a cost–
benefit analysis
– Government
• Decide what public goods to provide
• In what quantities
– Cost–benefit analysis
• Compare the costs and benefits to society of providing a
public good without any price signals to observe
• Government findings on the costs and benefits
– Rough approximations at best
How much is a life worth?
Adding a traffic light to reduce the lose of life
• Cost: $10,000 for a new traffic light
• Benefit: increased safety
– Risk of a fatal traffic accident
• Drops from 1.6% to 1.1 %
• Obstacle: To measure costs and benefits in the
same units
• Must put a dollar value on a human life
How much is a life worth?
• Putting a dollar value on a human life
– Implicit dollar value
• Courts award damages in wrongful-death suits
– Ignores other opportunity costs of losing one’s life
• Risks people are voluntarily willing to take
• Value of human life equals approximately $10 million
• Cost-benefit analysis
• A Traffic light reduces risk of fatality by 0.5 percentage
points (1.6% to 1.1 %)
• Expected benefit = 0.005 × $10 million = $50,000
• Cost ($10,000) < Benefit ($50,000)
• Approve the traffic light
Common Resources
• Not excludable
• Rival in consumption
• The tragedy of the commons
– Parable: why common resources are used
more than desirable from society’s standpoint
– Social and private incentives differ
– Arises because of a negative externality
Common Resources
The tragedy of the commons
– Negative externality
• One person uses a common resource and
diminishes other people’s enjoyment of it
• Common resources tend to be used excessively
– Government can solve the problem
• Regulation or taxes to deduce consumption of the
common resource
• Turn the common resource into a private good
Common Resources
Some important common resources
– Clean air and water
– Congested roads
– Fish, whales, and other wildlife
Common Resource: Animal Species
Species of animals with commercial value are
threatened with extinction
– Buffalo in North America in 19th century
• Common Resource
• Over hunted to near extinction
– The European cow in North America
• Private Good
• Species continues to thrive
Common Resource: Animal Species
• Elephants as a common resource in Africa
– No owners
– Poachers are numerous
• Strong financial incentive to kill them
• Slight incentive to preserve them
• Cows are private good
– Ranches: privately own cow (protected by law)
– Ranchers
• Great effort to maintain the cattle population on his ranch
• Reaps the benefit of commercial value
Why the cow is not extinct
Government intervention to help the elephant
– Elephants are common resource in Kenya, Tanzania,
and Uganda
• Illegal to kill elephants; Illegal to sell ivory
• Hard to enforce
• Elephant population continues to diminish
– Elephants are private goods in Botswana, Malawi,
Namibia, and Zimbabwe
• People are allow to hunt elephants
• Landowners have an incentive to preserve elephants
• Elephant population – started to rise