PUBLIC GOODS AND
COMMON RESOURCES
16
CHAPTER
Objectives
After studying this chapter, you will able to
 Distinguish among private goods, public goods, and
common resources.
 Explain how the free-rider problem arises and how the
quantity of public goods is determined
 Explain the problem of the commons and its possible
solutions
Free Riding and Overusing the Commons
Why does government provide some goods and services
such as the enforcement of law and order and national
defense?
Why don’t we let private firms produce these items and
leave people to buy the quantities they demand?
Ocean fish are a common resource that everyone is free
to take.
Are our fish stocks being depleted? What can be done to
conserve the world’s fish?
Classifying Goods and Resources
What is the essential difference between:
 A city police department and Brinks security
 Fish in the Atlantic Ocean and fish in a fish farm
 A live concert and a concert on television
These, and all goods and services can be classified
according to whether they are excludable or
nonexcludable and rival or nonrival.
Classifying Goods and Resources
Excludable
A good, service, or resource is excludable if it is
possible to prevent a person from enjoying its benefits.
Nonexcludable
A good, service, or resource is nonexcludable if it is
impossible to prevent a person from enjoying its
benefits.
Classifying Goods and Resources
Examples of excludable items are:
 The services of Brinks security
 Fish in a fish farm
 A live concert
Examples of nonexcludable items are:
 The services of the city police department
 Fish in the Atlantic Ocean
 A broadcast television signal
Classifying Goods and Resources
Rival
A good, service, or resource is rival if its consumption
by one person decreases its consumption by other
people.
Nonrival
A good, service, or resource is nonrival if its
consumption by one person does not decrease its
consumption by other people.
Classifying Goods and Resources
Examples of rival items are:
 The services of Brinks security
 Fish both in ocean and in a fish farm
 A seat at a live concert
Examples of nonrival items are:
 The protection provided by a city police department
 A broadcast television signal
Classifying Goods and Resources
A Four-Fold Classification
Private good
A good or service that can be consumed by only one
person at a time and only by those people who have
bought it or own it.
Public good
A good or service that can be consumed simultaneously
by everyone and from which no one can be excluded.
Classifying Goods and Resources
Common resource
A resource that is nonexcludable and rival—can be
used only once but no one can be prevented from using
what is available.
Natural monopoly
A good or service that is nonrival but excludable—can
be produced at zero marginal cost.
Classifying Goods and Resources
Figure 16.1
shows this
four-fold
classification
of goods and
services.
Public Goods and the Free Rider Problem
The Free-Rider Problem
A free rider is a person who consumes a good without
paying for it.
Public goods create a free-rider problem because the
quantity of the good that a person is able to consume is
not influenced by the amount that the person pays for the
good, so no one has an incentive to pay and an
unregulated market would produce an too little of the
good.
Public Goods and the Free Rider Problem
The Benefit of a Public Good
The value of a private good is the maximum amount that a
person would pay for one more unit, which is shown by the
person’s demand curve.
The value of a public good is the maximum amount that all
the people are willing to pay for one more unit of it.
The total benefit of a public good to an individual is the
dollar value that a person places on a given level of
provision of the good.
Public Goods and the Free Rider Problem
The marginal benefit of a public good to an individual is
the increase in total benefit that results from a one-unit
increase in the quantity provided. The marginal benefit of a
public good diminishes with the level of the good provided.
Everyone can consume each unit of a public good, which
means the marginal benefit for the economy is the sum of
marginal benefits of each person at each quantity.
Public Goods and the Free Rider Problem
Figure 16.2 shows how the
marginal benefits of a
public good are summed
at each quantity of the
good provided.
Part (a) shows Lisa’s
marginal benefit.
Part (b) shows Max’s
marginal benefit.
Public Goods and the Free Rider Problem
The economy’s marginal
benefit of a public good is
the sum over the
individuals at each quantity
of the good provided.
The economy’s marginal
benefit curve for a public
good is the vertical sum of
each individual’s marginal
benefit curve.
Public Goods and the Free Rider Problem
It contrasts with the
demand curve for a private
good, which is the
horizontal sum of the
individual demand curves
at each price.
Public Goods and the Free Rider Problem
The Efficient Quantity of a
Public Good
The efficient quantity of a
public good is the quantity
that maximizes net
benefit—total benefit minus
total cost—which is the
same as the quantity at
which marginal benefit
equals marginal cost.
Figure 16.3 illustrates the
efficient quantity.
Public Goods and the Free Rider Problem
The total cost curve, TC, is
like the total cost curve for
a private good.
The total benefit curve, TB,
is just the sum of the
marginal benefit at each
output level.
The efficient quantity is
where net benefit is
maximized.
Public Goods and the Free Rider Problem
Equivalently, the efficient
quantity is produced where
marginal benefit equals
marginal cost.
Public Goods and the Free Rider Problem
The marginal benefit
curve, MB, is the one
we’ve just derived.
The marginal cost curve,
MC, is just like the MC
curve for a private good.
The efficient quantity is
where marginal benefit
equals marginal cost.
Public Goods and the Free Rider Problem
Private Provision
If a private firm tried to produces and sell a public good,
almost no one would buy it.
The free-rider problem results in too little of the good being
produced.
Public Goods and the Free Rider Problem
Public Provision
Because the government can tax all the consumers of the
public good and force everyone to pay for its provision,
public provision overcomes the free-rider problem.
If two political parties compete, each is driven to propose
the efficient quantity of a public good. A party that
proposes either too much or too little can be beaten by
one that proposes the efficient amount, because more
people vote for an increase in net benefit.
Public Goods and the Free Rider Problem
The attempt by politicians to appeal to a majority of voters
leads them to the same policies, which is an example of
the principle of minimum differentiation—the tendency for
competitors to make themselves identical to appeal to the
maximum number of clients (voters). (The same principle
applies to competing firms such as McDonald’s and
Burger King).
Public Goods and the Free Rider Problem
The Role of Bureaucrats
Figure 16.4 shows the goal
of the bureaucrat, which is
to seek the highest
attainable budget for
providing a public good.
Public Goods and the Free Rider Problem
Bureaucrats might provide
the efficient quantity.
But they try to increase
their budget to equal the
total benefit of the public
good and drive the net
benefit to zero.
Bureaucrats might also try
to over provide a public
good.
Public Goods and the Free Rider Problem
Well-informed voters
would ensure that the
politicians prevented the
bureaucrats from
increasing their budget
above the minimum total
cost of producing the
efficient quantity.
But is it not rational for
voters to be well informed.
Public Goods and the Free Rider Problem
Rational Ignorance
Rational ignorance is the decision by a voter not to
acquire information about a policy or public goods
provision because the expected benefit to the voter from
knowing the information is less than the cost of acquiring
the information.
Public Goods and the Free Rider Problem
For voters who consume but don’t produce a public good,
it is rational to be ignorant about the costs and benefit.
For voters who produce a public good, it is rational to be
well informed.
So the political equilibrium is one that favors the producer
and bureaucrat and is an inefficient over provision of
public goods.
Public Goods and the Free Rider Problem
Two Types of Political Equilibrium
The two types of political equilibrium—efficient provision
and inefficient over provision of public goods correspond
to two theories of government:
Social interest theory predicts that political equilibrium
achieves efficiency because well-informed voters refuse to
support inefficient policies.
Public choice theory predicts that government delivers an
inefficient allocation of resources—that government failure
parallels market failure.
Public Goods and the Free Rider Problem
Why Government Is Large and Grows
Government grows because the demand for some public
goods is income elastic.
Government might be too large because of inefficient
overprovision.
Public Goods and the Free Rider Problem
Voters Strike Back
If government grows to large relative to the value voters
place on public goods, there might be a voter backlash
that leads politicians to propose smaller government.
Privatization is one way of coping with overgrown
government and is based on distinguishing between public
provision and public production of public goods.
Common Resources
The Problem of the Commons
The problem of the commons is the absence of
incentives to prevent the overuse and depletion of a
commonly owned resource.
Examples include the Atlantic Ocean cod stocks, South
Pacific whales, and the quality of the earth’s
atmosphere.
The traditional example from which the term derives is
the common grazing land surrounding middle-age
villages.
Common Resources
Sustainable Production
Figure 16.5 illustrates
production possibilities
from a common resource.
As the number of fishing
boats increases, the
quantity of fish caught
increases to some
maximum.
Beyond that maximum, the
sustainable catch
decreases.
Common Resources
An Overfishing
Equilibrium
Figure 16.6 shows why a
common resource get
overused.
1. The average catch per boat,
which is the marginal private
benefit, MPB, decreases as
the number of boats
increases.
2. The marginal cost per boat
is MC (assumed constant).
Common Resources
3. Equilibrium occurs where
marginal private benefit,
MPB, equals marginal cost,
MC.
In equilibrium, the resource is
overused because no one
takes into account the effects
of her/his actions on other
users of the resources.
Common Resources
The Efficient Use of the Commons
The quantity of fish caught by each boat decreases as
the number of boats increases.
But no one has an incentive to take this fact into
account when deciding whether to fish.
The efficient use of a common resource requires
marginal cost to equal marginal social benefit.
Common Resources
Marginal social benefit is the increase in total fish catch
that results from an additional boat, not the average
catch per boat.
The table on the next slide shows the calculation of
marginal social benefit.
Common Resources
A
Boats
Total Catch
0
0
MSB
90
B
1
90
70
C
2
160
50
D
3
210
30
E
4
240
Common Resources
Figure 16.7 illustrates the
efficient use of a common
resource.
1. The marginal social benefit
curve, MSB, is below the
MPB curve.
2. The resource is used
efficiently when MSB
equals MC.
Common Resources
Achieving an Efficient Outcome
It is harder to achieve an efficient use of a common
resource than to define the conditions under which it
occurs.
Three methods in use are:
 Property rights
 Quotas
 Individual transferable quotas (ITQs)
Common Resources
Property Rights
By assigning property rights, common property becomes
private property.
When someone owns a resource, the owner is
confronted with the full consequences of her/his actions
in using that resources.
The social benefits become the private benefits.
Common Resources
In Figure 16.7, the
marginal social benefit
curve, MSB, becomes the
marginal private benefit
curve.
The resource is used
efficiently because the
owner of the resources is
best off when MSB equals
MC.
Common Resources
Quotas
By assigning setting a
production quota at the
efficient quantity, a
common resource might
remain in common use but
be used efficiently.
Figure 16.8 shows this
situation.
It is hard to make a quota
work.
Common Resources
Individual Transferable Quotas
An individual transferable quota (ITQ) is a production
limit that is assigned to an individual who is free to
transfer the quota to someone else.
A market emerges in ITQs.
If the efficient quantity of ITQs is assigned, the market
price of a quota confronts resource users with a marginal
cost that equals MSB at the efficient quantity.
Common Resources
Figure 16.9 shows the
situation with an efficient
number of ITQs.
Marginal cost rises from
MC0 to MC1.
Users of the resource
make marginal private
benefit, MPB, equal to
marginal private cost, MC1,
and the outcome is
efficient.
Common Resources
Public Choice and Political Equilibrium
It is easy for economists to agree that ITQs make it
possible to achieve an efficient use of a common
resource.
It is difficult to get the political market place to deliver that
outcome.
In 1996, Congress killed an attempt to use ITQs in the
Gulf of Mexico and the Northern Pacific Ocean.
Self-interest and capture of the political process
sometimes beats the social interest.
THE END