Review: The classification of goods

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Review The classification of goods

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Are lighthouses public goods?
Benefits that the light house provided to ship
captains
Not excludable
Not rival
So captains have incentives to free ride
But in some cases, lighthouses may be closer to
private goods 19th century England, instead of
charging ship captains, private owner of
lighthouse charged the private owner of the
nearby port for the lighthouse service.
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Is it a public good?

• Determine the number of beneficiaries
• -- typically a large number of beneficiaries
• Whether these beneficiaries can be excluded from
  enjoying the good
• -- exclusion of any one of them is
  technologically difficult or very costly
  incentives to free ride
• The focus of the problem
• -- private market fails to supply or undersupply
  a valuable good or service, so government must
  step in

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• We would typically conclude that public goods
  need to be provided by the government rather
  than by the private sector.
• On the other hand, if there is a big inefficiency
  from underprovision of a public good, there is a
  strong incentive for the private market to
  develop ways to make the good excludable.

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Examples of making good excludable

• Technological advance made downloading music from
  the web essentially a public good.
• In response record companies developed
  technologies to make it excludable.
• Some households might want more police protection
  or parkland than is provided by the city.
• In response private developers have built gated
  communities with large public areas.

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Common Resources

• These are goods that are rival but non-excludable
• The tragedy of the commons
• - Common resources create a problem called the
  tragedy of the commonsthe absence of incentives
  to prevent the overuse and depletion of a resource

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Tragedy of the commons
a multi-player extension of Prisoners Dilemma
Game
- 14th century England, villagers shared a common
area for grazing. - The tragedy occurs when no
one had an incentive to ensure that the land was
not over grazed. - The result is a severe
overgrazing situation and all villagers suffered
in the long run. - 16th century, the commons
were gradually enclosed and privatized.
Overgrazing ended.