In this chapter we examine the problems that arise for goods without market prices. After completing this chapter, students will be able to: Learn the defining characteristics of public goods and common resources, examine why private markets fail to provide public goods, consider some of the important public goods in our economy,...
Public Goods and Common Resources Chapter 11 Copyright © 2001 by Harcourt, Inc All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, “The best things in life are free .” Free goods provide a special challenge for economic analysis Most goods in our economy are allocated in markets… …for these goods, prices are the signals that guide the decisions of buyers and sellers Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc “The best things in life are free .” When goods are free, people do not have the incentive to produce Market forces are absent Government must step in Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc The Different Kinds of Goods When thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the good excludable? Is the good rival? Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc The Different Kinds of Goods Excludability People can be prevented from enjoying the good Laws recognize and enforce private property rights Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc The Different Kinds of Goods Rivalness One person’s use of the good diminishes another person’s enjoyment of it. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Four Types of Goods Private Goods Public Goods Common Resources Natural Monopolies Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Types of Goods Private Goods Are both excludable and rival Public Goods Are neither excludable nor rival Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Types of Goods Common Resources Are rival but not excludable Natural Monopolies Are excludable but not rival Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Types of Goods Rival? Yes Private Goods Yes Excludable? No Icecream cones Clothing Congested toll roads No Natural Monopolies Fire protection Cable TV Uncongested toll roads Common Resources Public Goods Fish in the ocean The environment Congested nontoll roads Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc National defense Knowledge Uncongested nontoll roads The Free-Rider Problem A freerider is a person who receives the benefit of a good but avoids paying for it Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc The Free-Rider Problem Since people cannot be excluded from enjoying the benefits of a public good, individuals may withhold paying for the good hoping that others will pay for it The freerider problem prevents private markets from supplying public goods Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Solving the Free-Rider Problem The government can decide to provide the public good if the total benefits exceed the costs The government can make everyone better off by providing the public good and paying for it with tax revenue Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Some Important Public Goods National Defense Basic Research Programs to Fight Poverty Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Are Lighthouses Public Goods? Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Cost-Benefit Analysis 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 estimates the total costs and benefits of a good to society as a whole Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Cost-Benefit Analysis A costbenefit 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 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Common Resources Common resources, like public goods, are not excludable. They are available free of charge to anyone who wishes to use them Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Common Resources Common resources are rival goods because one person’s use of the common resource reduces other people’s use Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Tragedy of the Commons The Tragedy of the Commons is a story with a general lesson: When one person uses a common resource, he or she diminishes another person’s enjoyment of it Common resources tend to be used excessively when individuals are not charged for their usage. This creates a negative externality Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Examples of Common Resources Clean air and water Oil pools Congested roads Fish, whales, and other wildlife Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Why Isn’t the Cow Extinct? (As opposed to other animals!) Private Ownership and the Profit Motive! Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Importance of Property Rights The market fails to allocate resources efficiently when property rights are not wellestablished (i.e. some item of value does not have an owner with the legal authority to control it) Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Importance of Property Rights When the absence of property rights causes a market failure, the government can potentially solve the problem Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc ... Types of Goods Private Goods Are both excludable and rival Public Goods Are neither excludable nor rival Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Types of Goods Common Resources. .. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Four Types of Goods Private Goods Public Goods Common Resources Natural Monopolies Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc... The value of life, the consumer’s time, and aesthetics are difficult to assess Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc Common Resources Common resources, like public goods, are not excludable. They are