2 Types of Goods Excludability Rivalry Property of a good/service Means I can stop someone from using itRivalryMeans 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?YesNoPrivate GoodsExamplesIce CreamClothingNatural Monopolies-Fire Protection-Cable TVCommon Resource-Fish in the Ocean-The EnvironmentPublic Goods-National Defense-Tornado Warning SystemYesExcludable?No
4 Private Goods Public Goods Common Resources Natural Monopolies Excludable and Rival in consumptionPublic GoodsNon Excludable and Non Rival in consumptionCommon ResourcesNon Excludable but Rival in consumptionNatural MonopoliesExcludable but Non Rival in consumption
5 Public Goods and Common Resources Private GoodsNo problem, we have marketsNatural MonopoliesMaybe regulate the monopoly, but not big problemPublic Goods and Common ResourcesNon Excludable (cant stop someone from using)So no price can be attached to it, don’t have to payNo market will form, so government has to find a remedyExternalities
6 Public Goods Free Rider Problem People will enjoy the service but wont pay for it, they’re just getting a free rideSo private market will not supply goodGovernment can fix this by providing the good/service and taxing to pay for itIf total benefits are greater than total cost then the government should provide it and welfare will improvePositive Externality
7 Important Public Goods Provided By the Government National DefenseBasic ResearchFighting Poverty
8 Cost verses BenefitsIf the government is going to supply the public good must first decide whether to or not and then how much.Benefits must outweigh CostsBut there is no market so no price signalsHow 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…….BenefitsLower average traffic wrecks and less lives lostHow to measure this benefitHow do you put a price on a life?Use hazardous pay to estimate maybeIf Benefits > Costs then put up median
10 Common Resources Common Resources Tragedy of the Commons Non Excludable but Rival in ConsumptionTragedy of the CommonsCommon resource get overusedPrivate incentive and Social incentive divergeMy usage may be good for me (private) but bad for the overall efficiencyBecause my usage diminishes everyone else’s takeNegative Externality
11 Example of Tragedy of the Commons: Fishing # of BoatsCatch Per BoatTotal Catch110220392748325735636*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 tradeSuch as is done in fisheries, they limit boat numbers and limit catches so overfishing is not doneTurn it in to a private resourceThis gives the owner an incentive to maximize the usage and so will stop the tragedy cause now it is in his best interestThis 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