Public Goods and Common Resources

1
Chapter 11

• Public Goods and Common Resources

2
Ch 11 Outline
Serve!

• Exclusion Rivalry
• Four Kinds of Goods
• Govt Policy Public Goods

3
. . . the best things in life are free.

• Most goods allocated in markets. . .
• prices guide buyers sellers
• When goods are free, market forces are absent.

4
. . . the best things in life are free.

• Without prices, markets cannot ensure optimal
  output
• Government can remedy market failure.

5
The Different Kinds of Goods

• Goods grouped by two characteristics
• Excludability
• Rivalry

6
The Different Kinds of Goods

• Excludability
• Can prevent people from enjoying the good.
• Laws enforce property rights.
• Rivalry
• One persons use of the good reduces benefits to
  others.

7
Different Kinds of Goods
Rival?
Yes
No
Natural Monopoly (e.g., power company)
Private Good (e.g. rare coin)
Yes

Excludable?
Common Resources (e.g. Presque Isle)
Public Goods (e.g., I-90 at 3 A.M.)
No
8
Four Different Categories of Goods

• Private Goods
• Public Goods
• Common Resources
• Natural Monopoly

9
Goods Categories

• Private Goods
• excludable and rival.
• Beer Kegs, Home Its Gardens, Autos. . .
• Public Goods
• Neither excludable nor rival.
• General Knowledge, Basic Research, National
  Defense . . .

10
Goods Categories

• Common Resources
• Rival but not excludable.
• Wildlife, Oil Pools, Clean Air, . . .
• Natural Monopoly
• Excludable but not rival.
• Fire protection, cable TV, . . .

Turtles! They never mention turtles when they
talk of common resources
11
Examples of Common Resources

• Clean air water
• Oil pools
• Congested roads
• Fish, whales, and other wildlife

12
Quick Quiz

• Define public goods and common resources.
• Give an example of each.

13
Public Goods. . .

• Available to all with no charge -- not
  excludable.
• Externality here something of value has no price
• i.e. people get benefits without paying

Like this nearly deserted Lake...
14
Lake Omric
5AM Wake-Up Call-Yawl
15
Public Goods Free Rider Problem

• Free-Rider person receives benefit of a good
  without paying
• Individuals do not pay for good in hopes that
  others will finance good.

No Free Riders!
16
Free Rider Problem Solution

• If government believes benefits exceed costs, it
  pays for good with tax revenue

17
Some Important Public Goods

• National Defense
• Basic Research

18
Cost-Benefit Analysis

• Cost-Benefit Analysis Estimates total costs and
  benefits of project to society.

19
Cost-Benefit Analysis...

• Difficult to perform with certainty
• Value of life, consumers time, aesthetics all
  hard to measure

20
Costs Benefits of Erosion Barrier

• BENEFITS
• Maintenance 20m
• More Tourists 15m
• Lower Insurance 15m
• TOTAL 50m

• COSTS
• Construction 25m
• Up-Keep Wall 15m
• TOTAL 40m

Benefits/Costs 50m/40m 1.25
21
Benefit Cost Analysis

• Project Benefit/Cost Ratio
• Replacing Sewage Plant 2.64
• Alligator Patrol, St Johns R 1.78
• Beach Erosion Barrier 1.25
• New City Hall Building 1.10
• Adding 4th Lane to A1A 0.90
• Buy Snow Removal Equip 0.01

22
Quick Quiz

• What is the free-rider problem?
• Why does the free-rider problem induce the
  government to provide public goods?
• What is cost-benefit analysis?

23
Common Resources

• Common Resources
• Not excludable - available free to all
• Are rival goods
• One persons use reduces use by others

24
Tragedy of Commons

• One persons use diminishes other peoples
  enjoyment
• a negative externality. Common resources
  over-used
• Government can impose a tax or regulate use of
  common resource or turn it into a private good.

25
Importance of Property Rights

• Some valuable resources have no owner who can
  control access

26
Importance of Property Rights

• Government
• Defines property rights lets market forces work
  
• (Elephants in Africa vs Cows in US).
• Regulates to stop overuse.
• (Hunting Season, licenses etc)
• Can supply the good
• (Fourth of July Parade).