Public Goods and Common Resources

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

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

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

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

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

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

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?

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

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

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.

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

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