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Public Goods and Common Resources. Types of Goods Excludability – Property of a good/service – Means I can stop someone from using it Rivalry – Property.

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Presentation on theme: "Public Goods and Common Resources. Types of Goods Excludability – Property of a good/service – Means I can stop someone from using it Rivalry – Property."— Presentation transcript:

1 Public Goods and Common Resources

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

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

4 Private Goods – 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 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, dont 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, theyre 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 – 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 elses take Negative Externality

11 # of BoatsCatch Per BoatTotal Catch 110 2 20 3927 4832 5735 66 36* 7535 8432 9327 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. Example of Tragedy of the Commons: Fishing

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


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