Prepared by: Renalyn C.

Enciso
E-mail Address: renalyn.enciso@clsu2.edu.ph

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

ECON 1000 Applied Economics

Module 5
Topic 1 Public Goods and Common Resources

Overview

An old song lyric states that “the best things in life are free.” A
moment’s thought reveals a long list of goods that the songwriter could have
in mind. Nature provides some of them, like rivers, mountains, beaches and
forests. The government provides others, like parks, playgrounds and
parades. In each case, people do not pay a fee when they want to benefit
from that good.
Free goods provide a special challenge to economists and policy-
makers. Most goods are sold in market, where price determines the market
condition. When goods are available for free, the market forces that balances
supply and demand is absent.
In this module, we will examine the problems that arise from the
allocation of free resources. When a good is free of charge, private markets
cannot ensure that the good is consumed and produced in proper amounts.
In such cases, government intervention can potentially remedy the market
failure and raise economic well-being.

I. Objectives
Upon successful completion of the module, the students will be able to…
1. determine the differences between public goods and common
resources.
2. analyze why the cost and benefit analysis of public goods is both
necessary and difficult
3. understand the importance of property rights
 ECON 1000 (Applied Economics)

II. Learning Activities

THE DIFFERENT KINDS OF GOODS

In economics, goods can be categorized in many different ways. One of the

most common distinctions is based on two characteristics: (1) excludability and
(2) rival in consumption. That means we categorize goods depending on whether
people can be prevented from consuming them (excludability) and whether
individuals can consume them without affecting their availability to other
individuals (rivalry).

Based on those two criteria, we can classify all physical products into four different
types of goods:

1. Private Goods – are both excludable

and rival in consumption. Most goods in
the economy are private goods. They
have to be purchased before they can
be consumed. Thus, anyone who cannot
afford private goods is excluded from
their consumption. Likewise, the
consumption of private goods by an
individual prevents other individuals
from consuming the same goods.
Therefore, private goods are also
considered rival goods. Figure 1. Private Goods

2. Public Goods – are neither

excludable nor rival in consumption.
That means no one can be prevented
from consuming them, and
individuals can use them without
reducing their availability to other
individuals. Examples of public goods
include fresh air, knowledge, national
defense, street lighting, etc.
Figure 2. Public Goods

Page 2 of 9
 ECON 1000 (Applied Economics)

3. Common Resources – are rival

in consumption but not
excludable. That means virtually
anyone can use them. However, if
one individual consumes common
resources, their availability to
other individuals is reduced. The
combination of those two
characteristics often results in an
overuse of common resources (the
tragedy of the commons).
Examples of common resources
include freshwater, fish oceans,
Figure 3. Common Resources
forests, pasture, etc.

4. Natural Monopoly –
sometimes regarded as club
goods. These are goods that is
excludable but not rival in
consumption. Thus, individuals
can be prevented from
consuming them, but their
consumption does not reduce
their availability to other
individuals. Club goods are
sometimes also referred to as
artificially scarce resources.
Figure 4. Club Goods
They are often provided by
natural monopolies. Examples of club goods include cable television,
cinemas, wireless internet, toll roads, etc.

Page 3 of 9
 ECON 1000 (Applied Economics)

Figure 5. Four Types of Goods: Summary

Figure 5 shows that goods can be grouped into four categories according
to two questions:
(1) Is the good excludable? Can people be prevented from using it?
(2) Is the good rival in consumption? Does one person’s use of the good
diminish other people’s use of it?

Page 4 of 9
 ECON 1000 (Applied Economics)

PUBLIC GOODS

In economics, a public good refers to a commodity or service that is made

available to all members of a society. The two main criteria that distinguish a public
good are that it must be non-rivalrous and non-excludable. Non-rivalrous means
that the goods do not dwindle in supply as more people consume them; non-
excludability means that the good is available to all citizens.
Let us consider for an example a fireworks display. This good is not
excludable because it is impossible to prevent someone from seeing the display,
and it is not rival in consumption because one person’s enjoyment does not
decrease someone else’s enjoyment.
An important issue that is related to public goods is referred to as the free-
rider problem. Since public goods are made available to all people–regardless of
whether each person individually pays for them–it is possible for some members
of society to use the good despite refusing to pay for it.

The Free-Rider Problem

The free rider problem is the burden on a shared resource that is created
by its use or overuse by people who aren't paying their fair share for it or aren't
paying anything at all. The free rider problem is an issue in economics. It is
considered an example of a market failure. That is, it is an inefficient distribution
of goods or services that occurs when some individuals are allowed to consume
more than their fair share of the shared resource or pay less than their fair share
of the costs.
Mankiw defined a free-rider as a person who receives the benefit of a good
but does not pay for it.

Solutions to the Free Rider Problem

1. Tax and government provision
One solution is to treat the many beneficiaries as one consumer and then
divide the cost equally. However, some may dislike this approach and choose to
not pay their obligations.

2. Appealing to people’ altruism

For some goods like visiting a garden, the garden may be able to raise funds
by asking for donations if you enjoy your visit. There will probably be many ‘free
riders’ who do not want to make a donation. However, some people may be willing
to make a donation to fund the cost of the garden/museum. This solution is only
effective for services which have a relatively low cost.

Page 5 of 9
 ECON 1000 (Applied Economics)

3. Make public good private

A beautiful garden could be seen as a public good. However, if you erect a
high barrier and limit entrance to those willing to pay, it loses its feature as a public
good and becomes a private good.

Some Important Public Goods

1. National Defense
The defense of the country from foreign aggressors is a classic
example of a public good. Once the country is defended, it is impossible to
prevent one person from enjoying it. Moreover, if a person enjoys the
benefit of national defense, he does not reduce the benefit others can
enjoy. Thus, national defense is neither excludable nor rival.

2. Basic Research
Knowledge is created through research. In evaluating the
appropriate public policy toward knowledge creation, it is important to
distinguish general knowledge from specific technological knowledge.
 Specific technological knowledge can be patented. The patent gives the
inventor that exclusive right to the knowledge he has created for a
period of time.
 General knowledge is a public good. Mathematician cannot patent a
theorem. Once the theorem is proved, the knowledge is not excludable.

3. Fighting Poverty
The government tries to combat poverty, and there are programs
that are aimed at helping the poor.

Page 6 of 9
 ECON 1000 (Applied Economics)

COMMON RESOURCES

Common resources, like public goods, are not excludable. They are
available of charge to anyone who wish to utilize them. However, they are rival in
consumption. One person's use of the common resource reduces other people’s
ability to use it. Thus, common resources gives rise to a new problem. When the
good is provided, policymakers need to be concerned about how much it is used
the problem is best discussed from the classic parable, The Tragedy of the
Commons – a parable that illustrates why common resources get used more often
than is desirable from the viewpoint of the society as a whole.

The Tragedy of the Commons

According to Investopedia, the tragedy of the commons is an economics
problem in which every individual has an incentive to consume a resource, but at
the expense of every other individual -- with no way to exclude anyone from
consuming. Initially it was formulated by asking what would happen if every
shepherd, acting in their own self-interest, allowed their flock to graze on the
common field. If everybody does act in their apparent own best interest, it results
in harmful over-consumption (all the grass is eaten, to the detriment of everyone)
The problem can also result in under investment (since who is going to pay
to plant new seed?), and ultimately total depletion of the resource. As the demand
for the resource overwhelms the supply, every individual who consumes an
additional unit directly harms others -- and themselves too -- who can no longer
enjoy the benefits. Generally, the resource of interest is easily available to all
individuals without barriers (i.e. the "commons").

Page 7 of 9
 ECON 1000 (Applied Economics)

THE IMPORTANCE OF PROPERTY RIGHTS

The problems we encountered in this chapter arise in many markets, and

they share a common theme. The market fails to allocate the resources efficiently
because property rights is not well-established. Property right is the ability of an
individual to own and exercise control over scarce resources.
Property is secured by laws that are clearly defined and enforced by the
state. These laws define ownership and any associated benefits that come with
holding the property. The term property is very expansive, though the legal
protection for certain kinds of property varies between jurisdictions.
Property is generally owned by individuals or a small group of people. The
rights of property ownership can be extended by using patents and copyrights to
protect:
 Scarce physical resources such as houses, cars, books, and cellphones
 Non-human creatures like dogs, cats, horses or birds
 Intellectual property such as inventions, ideas, or words

Page 8 of 9
 ECON 1000 (Applied Economics)

References

Mankiw, Gregory. Principles of Microeconomics Fourth Edition. Thompson South

Western

Agarwal, Prateek (2020). “Price Floor.”

https://www.intelligenteconomist.com/price-floor/. Intelligent Economist.

Boyle, Michael J. (2020). “Tragedy of the Commons.”

https://www.investopedia.com/terms/t/tragedy-of-the-
commons.asp#:~:text=The%20tragedy%20of%20the%20commons%20i
s%20a%20problem%20in%20economics,common%20resource%2C%20t
o%20everybody's%20detriment.. Investopedia.

Fernando, Jason (2020). “Public Good.”

https://www.investopedia.com/terms/p/public-good.asp. Investopedia.

Kenton, Will (2019). “Property Rights.”

https://www.investopedia.com/terms/p/property_rights.asp. Investopedia.

Zeder, Raphael (2020). “The Four Different Types of Goods.”

https://quickonomics.com/different-types-of-goods/. Quickoconomics.

Page 9 of 9