Presentation on theme: "PRIVATE GOODS AND PUBLIC GOODS"— Presentation transcript:
1 PRIVATE GOODS AND PUBLIC GOODS What’s the difference between installing a newbathroom in a house and building a municipal sewagesystem?What’s the difference between growing wheat andfishing in the open ocean?In each case there is a basic difference in thecharacteristics of the goods involved. Bathroomappliances and wheat have the characteristics needed toallow markets to work efficiently; sewage systems andfish in the sea do not.Let’s look at these crucial characteristics and why theymatter…
2 TERMS Private goods, which are excludable and rival in consumption, like wheatPublic goods, which are nonexcludable and nonrivalin consumption, like a public sewer systemCommon resources, which are nonexcludable butrival in consumption, like clean water in a riverArtificially scarce goods, which are excludable but non-rival in consumption, like pay-per-view movies on cable TV.
3 CHARACTERISTICS OF GOODS Goods can be classified according to two attributes:whether they are excludable andwhether they are rival in consumptionA good is excludable if the supplier of that good canprevent people who do not pay from consuming it.A good is rival in consumption if the same unit ofthe good cannot be consumed by more than oneperson at the same time.
4 WHY MARKETS CAN SUPPLY ONLY PRIVATE GOODS EFFICIENTLY Goods that are both excludable and rival inconsumption are private goods. Private goods can beefficiently produced and consumed in a competitivemarket.When goods are nonexcludable, there is a free-riderproblem: consumers will not pay producers, leading toinefficiently low production.When goods are nonrival in consumption, theefficient price for consumption is zero. But if a positiveprice is charged to compensate producers for the cost ofproduction, the result is inefficiently low consumption.
5 COMMON RESOURCES A common resource is nonexcludable and rival in consumption: you can’t stop me from consuming thegood, and more consumption by me means less of thegood available for you.Some examples of common resources are clean air andwater as well as the diversity of animal and plantspecies on the planet (biodiversity).In each of these cases the fact that the good, thoughrival in consumption, is nonexcludable poses a seriousproblem.
6 THE PROBLEM OF OVERUSECommon resources left to the free market suffer fromoveruse: a user depletes the amount of the commonresource available to others but does not take this costinto account when deciding how much to use thecommon resource.In the case of a common resource, the marginal socialcost of my use of that resource is higher than myindividual marginal cost, the cost to me of using anadditional unit of the good.
7 THE EFFICIENT USE AND MAINTENANCE OF A COMMON RESOURCE To ensure efficient use of a common resource, societymust find a way of getting individual users of theresource to take into account the costs they impose onother users.Like negative externalities, a common resource can beefficiently managed:by Pigouvian taxes (tax or otherwise regulate the useof the common resource)by making it excludable and assigning property rights,or by the creation of a system of tradable licenses forthe right to use the common resource.
8 ARTIFICIALLY SCARCE GOODS An artificially scarce good is excludable but nonrivalin consumption.Because the good is nonrival in consumption, theefficient price to consumers is zero. However, because itis excludable, sellers charge a positive price, which leadsto inefficiently low consumption.It is made artificially scarce because producers charge apositive price but the marginal cost of allowing one moreperson to consume the good is zero.The problems of artificially scarce goods are similar tothose posed by a natural monopoly.
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