Revision: public goods, commons, and club goods

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Revisionpublic goods, commons, and club goods

• Unit 02

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A classification of goods

• Goods can be classified according to two
  characteristics
• excludability
• rivalry
• The existence or absence of these characteristics
  defines the type of good in question

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Public goods

• Public goods are neither excludable nor rival.
• The main problem with public goods is the
  existence of free riders individuals who enjoy
  the advantages of public goods without paying for
  them.
• A free rider behaves rationally if goods are
  non-excludable.
• This phenomenon and its consequences can be
  interpreted as the result of an externality
  providers of public goods generate a positive
  externality for those who enjoy them without
  paying for them.
• As a consequence, providers costs exceed their
  profits. This fact discourages the production of
  public goods.
• Solution the State can produce public goods or
  sponsor private initiatives that provide them, if
  the social benefit is higher than the social cost.

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In deciding whether to provide a public good or
not, the State should estimate the monetary value
citizens attribute to the public good.
(Marshalls notion of willingness to
pay) Ex. Citizens would be willing to pay 10
Euros for a firework display. If by rising a tax
of 2 Euros on each citizen this service can be
financed, the State will decide to provide
it. This is the domain of cost-benefit
analysis. The main problem consists in
attributing a demand price to goods that have no
price and when there is no sufficient incentive
to indicate this price (as in the case of private
goods). In these cases, we use estimations and
conjectures, on an analogical basis.
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Commons
Commons are not excludable although they are
rival. Tragedy of commons (ex. Communal
pasture-lands) (Hardin 1968) A common is
beneficial common until it is abundant in
relation to needs. However abundance generates
prosperity and stimulates the growth of the
economic activities that exploit them. ? the
common is exploited too much and becomes
sterile. The reason of this result is in the
difference between individual and social
incentives users have a collective interest in
keeping the exploitation of the resource at a
level compatible with its preservation, but they
have no individual interest in doing so, since
the deterioration of the resource only marginally
depends on their activity. Case of externality
everyone produces a negative externality on the
others, although he or she does not consider it
in deciding what quantity he or she will produce.
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Solutions

• Regulation of maximum producible quantities
• Selling by auction shares of exploitation of the
  resource
• Tax on the exploitation of the resource (it
  internalises the externality)
• Subdivision and privatisation of the common
  (enclosures)

• In syntesis
• Regulation
• Taxation
• privatisation

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Club goods
Club good are excludable and not rival. The
fundamental problem of club goods is the choice
of the optimum dimension of the club both in
terms of the number of members and in terms of
the dimension of facilities and
services. Increasing members reduces average
management costs. Conversely, increasing members
generates overcrowding and rivalry. Club
membership is voluntary individuals decide to
join a club if they derive a net benefit from it,
i.e. a benefit higher than subscription costs.
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Examples of club goods

• Pay TV
• Golf club
• Car Park
• A communication network

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The optimum dimension of clubs 1
Case 1. given dimension, variable membership
C1, B1 costs and benefits of the smallest
facility Ch, Bh costs and benefits of the
largest facility S1, Sh optimum members in
both cases
Bh
Costs / benefits per member
Ch
C1
B1
S1
Sh
Members
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The optimum dimension of clubs 2
C1, B1 costs and benefits with a single
member Cn, Bn costs and benefits with n
members Qh optimum capacity with n
members With a single member costs always exceed
benefits
Case 2. variable dimension, given members
C1
B1
Bn
Costs / benefits per member
Cn
Qn
Capacity
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The optimum dimension of clubs 3
The S line derives from case 1 optimum
membership as dimension increases The Q line
derives from case 2 optimum dimension as
membership increases G optimum dimension of
club
3. optimum dimension of a club
S
Capacity
Q
G
Members