Public goods and common resources
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PUBLIC GOODS AND COMMON RESOURCES. Chapter 11. “The best things in life are free. . .”. Most goods in our economy are allocated in markets. ä For these goods, prices are the signals that guide the decisions of buyers and sellers. “The best things in life are free. . .”.

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PUBLIC GOODS AND COMMON RESOURCES

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Public goods and common resources

PUBLIC GOODS AND COMMON RESOURCES

Chapter 11


The best things in life are free

“The best things in life are free. . .”

  • Most goods in our economy are allocated in markets.

    ä For these goods, prices are the signals that guide the decisions of buyers and sellers.


The best things in life are free1

“The best things in life are free. . .”

  • When goods are available free of charge, the market forces that normally allocate resources in our economy are absent.


The best things in life are free2

“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.


The best things in life are free3

“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.


The different kinds of goods

The Different Kinds of Goods

  • The various goods in our economy may be grouped by excludability and rivalness.


The different kinds of goods1

The Different Kinds of Goods

  • Excludability

    ä People can be prevented from enjoying the good.

    ä Laws recognize and enforce private property rights.


The different kinds of goods2

The Different Kinds of Goods

  • Rivalness

    ä One person’s use of the good reduces the benefits available to others.


Four types of goods

Four Types of Goods

  • Private Goods

  • Public Goods

  • Common Resources

  • Natural Monopolies


Types of goods

Types of Goods

  • Private Goods

    ä Are both excludable and rival.

  • Public Goods

    ä Are neither excludable nor rival.


Types of goods1

Types of Goods

  • Common Resources

    ä Are rival but not excludable.

  • Natural Monopolies

    ä Are excludable but not rival.


Types of goods2

Types of Goods

Excludable?


Public goods

Public Goods

  • Goods that are not excludable and, therefore, are available to everyone free of charge.

    ä Externalities arise because something of value has no price attached to it.

    ä People receive benefits without having to compensate anyone for the use of scarce resources.


The free rider problem

The Free-Rider Problem

  • A free-rider is a person who receives the benefit of a good but avoids paying for it.


The free rider problem1

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 free-rider problem prevents private markets from supplying public goods.


Solution to the free rider problem

Solution to the Free-Rider Problem

  • The government should provide the good if its total benefits exceed the costs.

  • The government can make everyone better off by providing the good and paying for it with tax revenue.


Some important public goods

Some Important Public Goods

  • National Defense

  • Basic Research

  • Programs to Fight Poverty


Cost benefit analysis

Cost-Benefit Analysis

  • In deciding whether to provide a public good or not, one must determine the benefits and costs.


Cost benefit analysis1

Cost-Benefit Analysis

  • A cost-benefit analysiswould be used to estimate the total costs and benefits of the project to society as a whole.

    ä It is difficult to do because of the absence of prices needed to estimate social benefits and resource costs.

    äThe value of life, the consumer’s time, and aesthetics are difficult to assess.


Common resources

Common Resources

  • Common resources are not excludable.

  • They are available free of charge to anyone who wishes to use them.


Common resources1

Common Resources

  • Common resources are rival goods because one person’s use of the common resource reduces other people’s use.


Tragedy of commons

Tragedy of Commons

  • When a person uses a common resource, he or she diminishes other people’s enjoyment of it. This is known as the Tragedy of the Commons.

    ä Thus, common resources tend to be used excessively.

    ä This creates a negativeexternality.


Tragedy of commons1

Tragedy of Commons

  • Government can impose a tax or regulate the use of the common resource or turn the common resource into a private good.


Examples of common resources

Examples of Common Resources

  • Clean air and water

  • Oil pools

  • Congested roads

  • Fish, whales, and other wildlife


Importance of property rights

Importance of Property Rights

  • The market fails to allocate resources efficiently when property rights are not well-established.

  • When the absence of property rights causes a market failure, the government can potentially solve the problem.


Government can potentially solve the problem

Government can potentially solve the problem . . .

. . . by defining property rights and letting market forces work toward economic efficiency.

. . . by regulating the private behavior that is causing overuse.

. . . by supplying the good.


Conclusion

Conclusion

  • Goods differ in whether they are excludable and whether they are rival.

  • Markets work best for private goods, which are both excludable and rival.

  • Public goods are neither rival nor excludable.

  • Because of the free-rider problem, governments provide public goods.


Conclusion1

Conclusion

  • Common resources are rival but not excludable.

  • Because people are not charged for their use of common resources, they tend to use them excessively.

  • Government tries to reduce the use of common resources through regulation and taxation.


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