1. Public Goods and Common Resources

2. Types of Goods Excludability Rivalry Property of a good/service
Means I can stop someone from using it
Rivalry
Means if I use it, it takes away from someone else’s ability to use it

3. Types of Goods Private Goods Natural Monopolies Common Resource
Rival in Consumption?
Yes No
Private Goods
Examples
Ice Cream
Clothing
Natural Monopolies
-Fire Protection
-Cable TV
Common Resource
-Fish in the Ocean
-The Environment
Public Goods
-National Defense
-Tornado Warning System
Yes
Excludable? No

4. Private Goods Public Goods Common Resources Natural Monopolies
Excludable and Rival in consumption
Public Goods
Non Excludable and Non Rival in consumption
Common Resources
Non Excludable but Rival in consumption
Natural Monopolies
Excludable but Non Rival in consumption

5. Public Goods and Common Resources
Private Goods
No problem, we have markets
Natural Monopolies
Maybe regulate the monopoly, but not big problem
Public Goods and Common Resources
Non Excludable (cant stop someone from using)
So no price can be attached to it, don’t have to pay
No market will form, so government has to find a remedy
Externalities

6. Public Goods Free Rider Problem
People will enjoy the service but wont pay for it, they’re just getting a free ride
So private market will not supply good
Government can fix this by providing the good/service and taxing to pay for it
If total benefits are greater than total cost then the government should provide it and welfare will improve
Positive Externality

7. Important Public Goods Provided By the Government
National Defense
Basic Research
Fighting Poverty

8. Cost verses Benefits
If the government is going to supply the public good must first decide whether to or not and then how much.
Benefits must outweigh Costs
But there is no market so no price signals
How do we measure benefits when humans are concerned?

9. Example: Public Good Do we put a median between two streets? Costs
The cost of the cement/workers…….
Benefits
Lower average traffic wrecks and less lives lost
How to measure this benefit
How do you put a price on a life?
Use hazardous pay to estimate maybe
If Benefits > Costs then put up median

10. Common Resources Common Resources Tragedy of the Commons
Non Excludable but Rival in Consumption
Tragedy of the Commons
Common resource get overused
Private incentive and Social incentive diverge
My usage may be good for me (private) but bad for the overall efficiency
Because my usage diminishes everyone else’s take
Negative Externality

11. Example of Tragedy of the Commons: Fishing
# of Boats
Catch Per Boat
Total Catch 1 10 2 20 3 9 27 4 8 32 5 7 35 6
36*
Social Optimal: Overall Catch is greatest (note we are ignoring any fishing cost for simplicity sake)
Say at Optimal. I have one boat in the fleet, so my catch is 1 x 6 = 6. Now, if I add one more boat my catch is 2 x 5 = 10, so my private incentive is to add another boat, but this reduces the overall catch.
Same as if there are 8 boats each catching 4. If I have one boat my catch is 1 x 4 = 4. Now if I add another boat I get 2 x 3 = 6, so my private incentive is to add another.

12. Government should come in to fix the tragedy Has two types of options
Regulate or tax the action or cap and trade
Such as is done in fisheries, they limit boat numbers and limit catches so overfishing is not done
Turn it in to a private resource
This gives the owner an incentive to maximize the usage and so will stop the tragedy cause now it is in his best interest
This is being done in some African countries to promote wildlife – The locals “own” the tigers/buffalo and can sell rights to hunt, so have an incentive to preserve the populations

13. Some Common Resources Clean Air and Water Congested roadways
Wildlife – wild fish populations for example