Public Goods and Common Resources

Chapter 11

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IN THIS CHAPTER
• Four Types of Goods
− Private goods
− Public goods
− Club goods
− Common resources

• Excludability and Rivalry in consumption

• Not excludable
− Public goods and Common resources

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 IN THIS CHAPTER
• Public goods:
− Not excludable & Not rival in consumption
− Positive externalities: Free rider
− Cost–Benefit Analysis
− Public defense, basic research, and so on

• Common resources:
− Not excludable & Rival in consumption
− Negative externalities: The tragedy of the commons
• Corrective taxes and regulations
• Property rights
− Clean air and water, fish, and so on
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Not excludable
• We consume many goods without paying
− Parks, national defense, clean air and water

• When goods have no prices, the market forces that

normally allocate resources are absent

• The private market may fail to provide the socially efficient

quantity of such goods

Governments can sometimes improve market outcomes.

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Four Types of Goods
• Private goods
− Excludable & Rival in consumption (pizza)
Consume without paying
• Public goods
− Not excludable & Not rival in consumption (national
defense)

• Common resources
− Not excludable & Rival in consumption (Fish in the ocean)

• Club goods
− Excludable & Not rival in consumption (cable TV)
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Four Types of Goods

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 Characteristics of Goods
• Excludability
− People can be prevented from using a good
− Excludable: fish in a private pond
− Not excludable: fish in the ocean

• Rivalry in consumption
− One person’s use of a unit of a good reduces another
person’s ability to use it
− Rival: congested road
− Not rival: uncongested road
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 Characteristics of the road
Q) A road is which of the four kinds of goods?
− Hint: The answer depends on whether the road is
congested or not, and whether it’s a toll road or not.
Consider the different cases.
Rival in consumption or Not Excludable or Not

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 Characteristics of the road
• Rival in consumption? Only if congested.
• Excludable? Only if a toll road.

Four possibilities:
• Uncongested non-toll road: public good
• Uncongested toll road: club good
• Congested non-toll road: common resource
• Congested toll road: private good

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 Public Goods and Common Resources
• Public goods
− Not excludable & Not rival in consumption (national
defense)

• Common resources
− Not excludable & Rival in consumption (Fish in the
ocean)

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 Public Goods and Common Resources
• Not excludable
− People cannot be prevented from using them
− Available to everyone free of charge

• No price attached to it

• External effects
− Positive externalities: Public goods
− Negative externalities: Common resources

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 Public Goods
• Public goods
− Not excludable
− Not rival in consumption

• The free-rider problem occurs!

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 Example: Public Goods and Free Riders
• Let's say Korea University holds fireworks every year during a
festival
− For this, students pay 10,000 won per person.
− However, someone can see the fireworks near or far away
from school without paying.

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 Public Goods and Free Riders
• Free rider
− Person who receives the benefit(+) of a good but avoids
paying for it

• The free-rider problem

− Public goods are not excludable, so people have an
incentive to be free riders
− Prevents the private market from supplying the goods
− Market failure

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 Public Goods and Government
• Government can remedy the free-rider problem
− If total benefits of a public good exceeds its costs
− Provide the public good
− Pay for it with tax revenue
− Make everyone better off
− Problem: Measuring the benefit is usually difficult

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 Some important public goods
• National defense
− Very expensive public good

• Basic research
− General knowledge
− Subsidized by government
− The public sector fails to pay for the right amount and
the right kinds

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 Some important public goods
• Antipoverty programs financed by taxes
− Welfare system
• Provides a small income for some poor families
− Food stamps
• Subsidize the purchase of food for those with low
incomes
− Government housing programs
• Make shelter more affordable

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 Measuring Cost and Benefit
• Cost–benefit analysis
− Government decide what public goods to provide In what
quantities
− Study that compares the costs and benefits to society of
providing a public good
− Estimate the total costs and benefits of the project to
society as a whole
− Estimating costs and benefits of public projects are rough
approximations at best

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 CASE STUDY: Cost–Benefit Analysis
• Cost: $10,000 for a new traffic light

• Benefit: increased safety

− Risk of a fatal traffic accident
• Drops from 1.6 to 1.1%

• Obstacle
− Measure costs and benefits in the same units

• Put a dollar value on a human life?

− Priceless = infinite dollar value
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 CASE STUDY: Cost–Benefit Analysis
• Implicit dollar value of a human life
− Courts: award damages in wrongful-death suits
• Total amount of money a person would have earned
if he or she had lived
• Ignores other opportunity costs of losing one’s life
− Risks that people are voluntarily willing to take and how
much they must be paid for taking them
• Value of human life = $10 million

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 CASE STUDY: Cost–Benefit Analysis
• Traffic light
− Reduces risk of fatality by 0.5 percentage points

• Expected benefit = 0.005 × $10 million = $50,000

• Cost ($10,000) < Benefit ($50,000)

• Approve the traffic light!

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Common Resources
• Common resources
− Not excludable
− Rival in consumption

• The tragedy of the commons

− Parable that shows why common resources are used
more than desirable
• From society’s standpoint
− Social and private incentives differ
− Arises because of a negative externality
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Example: Common Resources
• Fish in the river
− Not excludable and Rival in consumption
− Common resources tend to be used excessively

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 The tragedy of the commons
• Negative externality
− One person uses a common resource diminishes other
people’s enjoyment of it
− Common resources tend to be used excessively

• Government can solve the problem

− 1) Regulation or taxes to reduce consumption of the
common resource
− 2) Turn the common resource into a private good

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 Some important common resources
• Clean air and water
− Negative externality: pollution
− Regulations or corrective taxes

• Congested roads
− Negative externality: congestion
− Corrective tax: charge drivers a toll; or increase tolls
during rush hour
− Tax on gasoline: but is also discourages driving on
uncongested roads
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 Some important common resources
• Congested roads
− Corrective tax
• Namsan Tunnel toll charge: 2,000 won
• The hours:7 a.m. to 9 p.m. on weekdays

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Some important common resources
• Fish, whales, and other wildlife
− Oceans: least regulated common resource
• Needs international cooperation
• Difficult to enforce an agreement
− Fishing and hunting licenses
− Limits on fishing and hunting seasons
− Limits on size of fish
− Limits on quantity of animals killed

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Why the Cow Is Not Extinct?

Property rights!

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 The Importance of Property Rights
• Market fails to allocate resources efficiently
− Because property rights are not well established
− Some item of value does not have an owner with the
legal authority to control it

• Government can potentially solve it

− Help define property rights and thereby unleash market
forces
− Regulate private behavior
− Use tax revenue to supply a good that the market fails
to supply
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 CHAPTER IN A NUTSHELL
• Goods differ in whether they are excludable and whether they
are rival in consumption.
− A good is excludable if it is possible to prevent someone
from using it.
− A good is rival in consumption if one person’s use of the
good reduces others’ ability to use the same unit of the
good.
− Markets work best for private goods, which are both
excludable and rival in consumption.
− Markets do not work as well for other types of goods.

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 CHAPTER IN A NUTSHELL
• Public goods are neither rival in consumption nor excludable.
− Examples of public goods include fireworks displays,
national defense, and the discovery of fundamental
knowledge.
− Because people are not charged for their use of the public
good, they have an incentive to free ride, making private
provision of the good untenable.
− Therefore, governments provide public goods, basing their
decision about the quantity of each good on cost–benefit
analysis.

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 CHAPTER IN A NUTSHELL
• Common resources are rival in consumption but not
excludable.
− Examples include common grazing land, clean air, and
congested roads.
− Because people are not charged for their use of common
resources, they tend to use them excessively.
− Governments can remedy this problem: regulations and
corrective taxes, to limit the use of common resources.

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