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Chapter 17 Public Goods and the Tragedy of the Commons. Market Equilibrium and Types of Goods. Equilibrium in a free market yields a number of important results. Goods must be produced at the lowest possible cost. Goods must satisfy the highest valued demands.
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Public Goods and the Tragedy of the Commons
Equilibrium in a free market yields a number of important results.
Goods must be produced at the lowest possible cost.
Goods must satisfy the highest valued demands.
Total surplus (consumer plus producer surplus) is maximized.
Some types of goods, however, may not yield these results.
Goods can be classified into different categories based on the following properties:
When a person can cheaply be prevented from using a good, it is Excludable.
When a person cannot cheaply be prevented from using a good, it is Non-excludable.
When one person’s use of a good reduces the ability of another person to use the same good, it isRival.
When one person’s use of a good does not reduce the ability of another person to use the same good, it is Non-rival.
Given these characteristics, all goods fall into one of the following categories:
Nonrival Public Goods
Each of these types of goods will have significant implications for market equilibrium.
Private Goodsare excludable and rival.
Most goods are private goods.
Private goods can be efficiently provided in competitive markets.
Since private goods are excludable, there is a strong incentive to pay for and thus to produce these goods.
Furthermore, since the goods are rival, excludability does not lead to inefficiency.
The only people excluded from consuming a private good in a competitive market are those who are not willing to pay the costs of production.
Public Goodsare non-excludable and non-rival.
Since public goods are non-excludable, it is difficult to get people to pay for them voluntarily.
Additionally, non-rivalry implies that production costs do not significantly change with additional users.
Given the nature of public goods, consumers have little incentive to pay for them.
A Free Riderenjoys the benefits of a public good without paying a share of the costs.
Free riders can disrupt market efficiency.
With a sufficient number of free riders, public goods will be underprovided by the market.
Failure to provide public goods at the optimal level can create substantial costs.
Thus, the need to produce public goods provides a strong argument for taxation and government provision.
By taxing everyone and producing the public good, government can make people better off.
Just because everyone can be made better off with taxation and government provision does not mean that everyone will be made better off.
Some people may want more of the public good while some may want less. Some people, in fact, may want none.
A Forced Rideris someone who pays a share of the costs of a public good (through taxation) but who does not enjoy the benefits.
If the government provides the public good, how much of it should the government produce?
Ideally, the government should produce the amount that maximizes total surplus (i.e., the total benefits of the public goods minus the total costs).
In practice this could be quite problematic.
The total benefit of a public good, for example, is the sum of the benefits to each individual.
How much each person values the good will not be known to the government.
Voting and other democratic processes can help to produce optimal amounts of public goods.
Nonrival Public Goodsare goods that are excludable but non-rival.
Markets can provide these goods but do so at an inefficient level.
Some consumers may be willing to pay the marginal cost of production, but these goods tend to be priced at a much higher level.
Common Resourcesare goods that are non-excludable but rival.
Consumers cannot be excluded from consuming these goods, but when anyone consumes a unit of a common resource, there is one less unit of the resource for everyone else.
Thus, there is a strong incentive to consume these resources before others resulting in overuse.
The Tragedy of the Commonsis the tendency for any good which is rival and non-excludable to be overused and undermaintained.
Since common resources are typically not owned, it is difficult to prevent anyone from gathering these goods.
Rivalry implies that when one person procures a common resource, a smaller amount of the good is available to everyone else.
As such, each individual has the incentive to gather the common resource before others.
The end result of this behavior is that the common resource will disappear.
Common resources like bison, elephants, fish, forests, and other wildlife can be subject to the tragedy of the commons.
These resources must be carefully maintained to remain useful, but there is little incentive for users to invest in maintenance.
The tragedy of the commons can be viewed as a type of externality where any investment in maintenance by an individual user provides an external benefit to others.
Some solutions to the tragedy of the commons:
Unclear property rights can make all solutions for the tragedy of the commons difficult to implement.
Fish in the ocean are clearly an example of a common resource.
Since 1960 the tuna catch has decreased by 75%.
Other types of fish are facing similar trends – overfishing is draining the oceans of fish.
Since fishing involves lots of unrelated people from different countries, social norms are not particularly effective methods to reduce overfishing.
Governments have also tried command and control regulations like limiting the number of fishing boats to no avail.
In 1986 New Zealand pioneered an alternative approach.
Individual Transferable Quotas (ITQs) provides the owner with the right to catch a certain tonnage of fish.
The sum of the ITQs adds up to the Total Allowable Catch set by the government.
ITQs can be bought and sold.
Furthermore, the government does not restrict the types of boats or equipment that fishermen can use.
The system has been extremely successful.