Mod 76
Public Goods &
Common Resources
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MARKET INEFFICIENCY/FAILURES
• Recall:
Adam Smith’s “invisible hand” of the
marketplace leads self-interested buyers and
sellers in a market to maximize the total benefit
that society can derive from a market.
But market failures can still happen.
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The Nature of Goods
• Up until now, we have always been looking at
“Private” goods…goods allocated in markets
through a price and supply and demand…
BUT
• When goods are available free of charge, the
market forces that normally allocate resources
in our economy are absent
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“The best things in life are free. . .”
• When a good does not have a price attached to
it, private markets cannot ensure that the good
is produced and consumed in the proper
amounts.
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“The best things in life are free. . .”
• In such cases, government policy can
potentially remedy the market failure that
results, and raise economic well-being.
• However, government policy might also create
a negative outcome, if policies are not well
thought-out or followed.
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THE DIFFERENT
KINDS OF GOODS
• For Public Goods and Common Resources, we
have an economic model to use for analysis:
• It is a matrix that group goods according to two
characteristics:
• Is the good excludable?
• Is the good rival?
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THE DIFFERENT
KINDS OF GOODS
• Excludability
• Excludability refers to the property of a good
whereby a person can be prevented from using it,
usually through a price or charge for it
• Rivalry or Shared Consumption
• Rivalry refers to the property of a good whereby
one person’s use diminishes other people’s use—in
other words, that particular good gets used up
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THE DIFFERENT
KINDS OF GOODS
• Four Types of Goods
•
•
•
•
Private Goods
Artificially Scarce Goods—also called “toll goods”
Common Resources
Public Goods
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Four Types of Goods
NO—Shared Consumption—YES
Rival?
Private Goods
Yes
OR
Shared Consumption?
Artificially Scarce/Toll Goods
• 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 siren
• National defense
• Uncongested nontoll roads
Excludable?
No
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Private Goods and Toll Goods
• Our experience with them
• Are they Excludable?
• They are allocated by having a price, so they ARE
excludable
• Are they Rival?
• Does my use (owning) of a good “use” that specific
good up?
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COMMON RESOURCES
• Common resources are not excludable. They
are available free of charge to anyone who
wishes to use them.
• However…Common resources are rival goods
(or NOT shared consumption) because one
person’s use of the common resource reduces
other people’s use.
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Tragedy of the Commons
• The Tragedy of the Commons is a parable that
illustrates why common resources get used
more than is desirable from the standpoint of
society as a whole.
• Common resources tend to be used excessively
when individuals are not charged for their usage.
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Some Important Common Resources
• Clean air and water
• Fish, whales, and other wildlife
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Solving the Common Resource Issue of a Good
being over-used b/c it is non-excludable
• Governments have several options:
• Regulate the common resource
• Apply a tax/fees for use of the common resource
• Create a system of tradable licenses to use the
common resource
• Make the common resource excludable by assigning
private property rights
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PUBLIC GOODS
• Public Goods are not excludable, AND they
have the quality of shared consumption (nonrival)
• Examples:
• National Defense
• Fireworks
• Lighthouses
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The Free-Rider Problem
• A free-rider is a person who receives the
benefit of a good but avoids paying for it.
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The Free-Rider Problem of Public Goods
• Free-riders say to themselves:
“Why should I pay for something when others can
get it for free?”
• The free-rider problem prevents private markets
from supplying these types of goods.
• No business wants to provide those goods—it is
not worth their while—not enough profit!!
• We want these goods, and no business would
offer them as a business good b/c their nature
makes them not profitable
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The Free-Rider Problem
• Solving the Free-Rider Problem
• The government can decide to provide the public
good if the total benefits exceed the costs.
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How a Government Decides to provide a
Public Good
• In order to decide whether to provide a public
good or not, the total benefits of all those who
use the good must be compared to the costs of
providing and maintaining the public good.
• Cost benefit analysis refers to a study that
compares the costs and benefits to society of
providing a public good.
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The Difficult Job of Cost-Benefit Analysis
• A cost-benefit analysis would be used to
estimate the total costs and benefits of the
project to society as a whole.
• It is difficult to do because of the absence of prices
needed to estimate social benefits and resource
costs.
• The value of life, the consumer’s time, and
aesthetics are difficult to assess.
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CONCLUSION:
Public Goods and Common Resources
• When there is a market failure because of the
intersection of qualities of excludability and
rivalry…
• Goods will not be produced or allocated
efficiently…
• Then, the government often steps in to try to
solve the problem.
• Such Government Solutions require scrutiny
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