Public Goods and Common
Resources
Characterizations of Goods,
Services or Resources
Excludability:
• Excludable when it is possible to prevent
a person from enjoying its benefits.
–
–
–
–
accounting services
apple
diamond mine
concert.
Excludability:
• Nonexcludable if it is virtually impossible to
prevent someone from benefiting from it.
– Fish in ocean
– radio program
– national defense
– street light
– air quality
– Maintenance of dams and main canal in
irrigation system.
Rivalry:
•
Rival if its use by one person decreases
the qty available for someone else.
–
–
–
–
–
accounting services
apple
diamond mine
McDo-Cartier bridge on Monday morning
Air quality
Rivalry
• Nonrival if its use by one person does not
decrease the qty available for someone
else.
•
•
•
•
•
concert (if seats left)
national defense
radio program
McDo-Cartier bridge on Sunday morning
Law and order
Where would you classify the
following?
•
•
•
•
•
An idea
Trees in the forest
Music
Software
City park
Excludability is generally a question of degree that
may depend on law, norms, customs, and
technology of both production and protection.
Classification of goods
• Private goods: Rival and excludable.
– apple
– my garden
– my office
• Public goods: Nonrival and nonexcludable.
– national defense
– law and order
– street lights
• Common resources: Rival and nonexcludable.
– ocean fish
– earth’s atmosphere
• Natural monopolies: Nonrival but excludable.
– Uncongested bridge
– Uncongested cable TV
– Uncongested internet
– Uncongested electricity or phone grid
NB Called natural monopoly because one firm can
usually provide service at lower cost than two or more
firms.
Public goods and the free-rider
problem
• Free rider: A person who enjoys the
benefits of a good or service without
paying for it.
• Little incentive to contribute towards public
goods.
• Public goods are generally under-supplied
without gvt intervention.
• What is the right amount of PG to supply?
Example of PG
• Lisa and Max
• Common parking
• No security lighting:
– Nonexcludable
– Nonrival
(graphic)
• For a PubG, the SMB is the vertical sum of
PMB at each qty.
• For a PrivG, the SMB is the horizontal sum
of PMB at each price.
• Other example: Helicopters for Canadian
peacekeeping
Public provision of PubG
• Done through political process.
Example:
• PubG: heli. for Peacekeeping missions
• 2 parties: Doves and Hawks
– Hawks prefer 300 heli
– Doves prefer 100 heli
– Rest of electoral platforms are identical
Political process
• Same deadweight losses: Cannot predict
election outcome
• Not an equilibrium…
• Equil at 200 heli.
• Voters are indifferent and outcome is
efficient.
• Example of competition in the “political
market-place” which leads to efficient
resource allocation.
Political Process
• Result depends on strong assumptions of
perfect info re:
– how voters compare parties’ platforms
– what politicians know about voters’ welfare
• 1. Informational problem:
– When bureaucrats have different objectives than max
social welfare and are better informed than voters and
politicians.
– eg: Bureaucrats may aim for max budget.
• exaggerate costs of heli
• Press for more heli
• NB Remember importance of education for
democracies: positive externalities.
• 2. Rational ignorance: When voter decides
not to acquire info because MC of doing
so is larger than expected MB.
• Large no of voters implies MB of acquiring
info is small compared to MC.
• Technicalities are left to bureaucrats.
• Heli. builders have large incentives to be
well informed and lobby politicians. They
have a disproportionate influence on
decision to buy heli.
Explaining gvt growth?
• 1. Changing voter preferences: Income
elasticity of demand for PubG >1.
– highways
– airports
– education
– int’l peacekeeping
• 2. Inefficient provision:
– Bureaucrats aim at budget max in the
presence of rational voter ignorance.
COMMON RESOURCES
• When resources are owned in common in
such a way that they can be freely
accessed, they will tend to be
overexploited.
– cod fisheries in Atlantic
– GHG in atmosphere
– forest in the Amazon
Why?
Ex: The Fishery
– The free access equilibrium (2 graphics)
The Fishery
• The MPB is the catch that one fisher gets
when he goes with his boat.
• The MSB is the increase in the total catch
of the fishery from that additional boat.
• MSB accounts for the fact that adding a
boat reduces the catch of all other boats.
• At the individual (private) level, each fisher
does not account for the effect he has on
other fishers.
• He only cares about his own catch.
Negative externality
• NB After 5000 boats, MSB is actually
negative! How is that possible?
• Tragedy of the Commons: Takes place
when large number of people access a
resource without any restriction.
• Incentives to conserve are virtually absent:
If I don’t catch the fish, someone else will.
• Efficient use implies MPB>MC :
– Individual incentives to overfish
Achieving efficiency
4 types of solutions:
– Property rights
– Quotas
– ITQs
– Managed CPR
1. The property rights solution
• Give the fishery to one person: Social and
private benefits coincide.
Efficient
• NB The problem was again one of
absence of PR over a resource.
• Other ex: Frequency spectrum for cell
phones
– gvt assigns PR through auctions
Problem with private PR:
•
•
•
•
How does one enforce PR on the Atlantic?
Amazonian forest?
Atmosphere?
A River?
Calls for more direct gvt intervention.
Quotas
• Set no. of boats at 4000.
Efficient
• Incentives to cheat may be large at 4000 boats.
– Requires monitoring
– Is no. of boats easier to verify than pure exclusion?
– Iceland: Limiting no. of boats led boat owners to saw
boats in two and make them longer to carry more
fish… Inefficient
Individual Transferable Quotas
• Same idea as transferable emissions
permits
• NB Not clear why this would reduce
monitoring costs. Maybe because quotas
will go to those who value them most?
Managed CPRs
(Esp in LDCs)
• Property in common but entry is not free.
• Community has rules, social norms,
customs, that can be enforced, including
quotas.
• People are punished for violating those
rules.
• Is a managed common a private PR with
many owners or gvt intervention?