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Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

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Presentation on theme: "Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it."— Presentation transcript:

1 Chapter Public Goods and Common Resources 11

2 The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it Rivalry in consumption – Property of a good – One persons use diminishes other peoples use 2

3 Figure Four types of goods 1 3 Rival in consumption? YesNo Excludable? Yes Private goods - Ice-cream cones - Clothing - Congested toll roads Natural monopolies - Fire protection - Cable TV - Uncongested toll roads No Common resources - Fish in the ocean - The environment - Congested nontoll roads Public goods - Tornado system - National defense - Uncongested nontoll roads Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one persons use of the good diminishes other peoples use of it. This diagram gives examples of goods in each category.

4 The Different Kinds of Goods Types of goods – Private goods Excludable & Rival in consumption – Public goods Not excludable & Not rival in consumption – Common resources Rival in consumption & Not excludable – Natural monopoly Excludable & Not rival in consumption 4

5 The Different Kinds of Goods Public goods & Common resources – Not excludable – People cannot be prevented from using them – No price attached to it – Positive externalities – Negative externalities 5

6 Public Goods The free-rider problem – Free rider – Person who receives the benefit of a good but avoids paying for it – Public goods – not excludable Free-rider problem prevents the private market from supplying the goods Government - can remedy the problem – If total benefits of a public good > its costs – Provide the public good – Pay for it with tax revenue – Make everyone better off 6

7 Public Goods Some important public goods – National defense Very expensive public good – Basic research General knowledge – Fighting poverty Welfare system Food stamps 7

8 Lighthouses – Mark specific locations so that passing ships can avoid treacherous waters Benefit - to the ship captain – Not excludable, not rival in consumption Incentive – free ride without paying – Most - operated by the government In some cases – Lighthouses - closer to private goods Coast of England, 19th century – Lighthouses – privately owned and operated – The owner - charged the owner of the nearby port Are lighthouses public goods? 8

9 Decide whether something is a public good – Determine who the beneficiaries are – Determine whether the beneficiaries can be excluded from using the good A free-rider problem – When the number of beneficiaries is large – Exclusion of any one of them is impossible Are lighthouses public goods? 9

10 Public Goods The difficult job of cost–benefit analysis – Government Decide what public goods to provide In what quantities – Cost–benefit analysis Compare the costs and benefits to society of providing a public good Doesnt have any price signals to observe Government findings on the costs and benefits – Rough approximations at best 10

11 Cost: $10,000 – 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 How much is a life worth? 11

12 Put a dollar value on a human life – Implicit dollar value Courts - award damages in wrongful-death suits – Ignores other opportunity costs of losing ones life Risks - people are voluntarily willing to take – Value of human life = $10 million 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 How much is a life worth? 12

13 Common Resources Common resources – Not excludable – Rival in consumption The tragedy of the commons – Parable - why common resources are used more than desirable From societys standpoint – Social and private incentives differ – Arises because of a negative externality 13

14 Common Resources The tragedy of the commons – Negative externality One person uses a common resource – Diminishes other peoples enjoyment of it Common resources tend to be used excessively – Government - can solve the problem Regulation or taxes – Reduce consumption of the common resource Turn the common resource into a private good 14

15 Common Resources Some important common resources – Clean air and water – Congested roads – Fish, whales, and other wildlife 15

16 Species of animals – Commercial value - threatened with extinction Buffalo – North America – Hunting - 19 th century Elephants – African countries – Hunting – today The cow – Commercial value – Species - continue to thrive Why the cow is not extinct 16

17 Elephant - common resource – No owners – Poachers - numerous Strong incentive to kill them Slight incentive to preserve them Cows - private good – Ranches - privately owned – Ranchers Great effort to maintain the cattle population on his ranch Reaps the benefit Why the cow is not extinct 17

18 Government intervention – help elephant population – Kenya, Tanzania, and Uganda Illegal to kill elephants; Illegal to sell ivory Hard to enforce Elephant population – still diminishing – Botswana, Malawi, Namibia, and Zimbabwe Elephants – private good Allow people to kill elephants – Only those on their own property Landowners - incentive to preserve elephants Elephant population – started to rise Why the cow is not extinct 18


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