Copyright©2004 South-Western 11 Public Goods and Common Resource
Copyright © 2004 South-Western The Main Idea… Goods without a price present a challenge Market forces that normally allocate resources are absent Private markets can’t ensure g/s is produced and consumed in proper amounts Gov’t policy can potentially remedy this market failure and increase efficiency
Copyright © 2004 South-Western Different Kinds of G/S When thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the g/s excludable? People can be prevented from using the g/s Is the good rival? One person’s use of the g/s reduces another person’s ability to use it
Copyright © 2004 South-Western Four Categories Private GoodsPrivate Goods Are both excludable and rival. Ice-cream cone Public GoodsPublic Goods Are neither excludable nor rival. National defense Common ResourcesCommon Resources Are rival but not excludable. Fish in the ocean Club Goods (a type of Natural Monopoly)Club Goods (a type of Natural Monopoly) Are excludable but not rival. Fire protection
Copyright © 2004 South-Western Volunteers, Come to the front of the room, please and thank you.
Copyright © 2004 South-Western Classify the goods in this demonstration… What type of good was the candy bar? How do you know? What type of good was the artwork? How do you know?
Copyright © 2004 South-Western Quick Quiz #1 In the table provided, provide at least two examples for each type of good.
Figure 1 Four Types of Goods Copyright © 2004 South-Western Rival? Yes Ice-cream cones Clothing Congested toll roads Fire protection Cable TV Uncongested toll roads No Private GoodsNatural Monopolies No Excludable? Fish in the ocean The environment Congested nontoll roads Tornado siren National defense Uncongested nontoll roads Common ResourcesPublic Goods
Copyright © 2004 South-Western Ponder This… Imagine the town of Krzyzanowskiville is thinking about putting on a fireworks display for the 4 th of July. Each of the town’s 500 residents place a $10 value on the experience for a total benefit of $5,000. The cost of putting on the fireworks display is $1,000. Does it make sense for the town of Krzyzanowskiville to put on the display? Why or why not? Would it be better to leave the fireworks display up to the private market? For example, should Eileen Dover, a Krzyzanowskiville entrepreneur, host the fireworks display and sell tickets to the event? Why or why not?
Copyright © 2004 South-Western A Better Solution… The local gov’t in Krzyzanowskiville can sponsor the fireworks display. The town council can raise everyone’s taxes by $2 and use the revenue to hire Eileen Dover to produce the fireworks. Everyone is better off by $8– the $10 at which residents value the fireworks minus the $2 tax bill. Eileen is part of the solution as she helps Krzyzanowskiville reach the efficient outcome as a public employee even though she could not do so as a private entrepreneur.
Copyright © 2004 South-Western Happy Thursday Pick up two pieces of scrap paper from the front desk. Write your name on both. Take out your class notes and be ready to start when the bell rings.
Copyright © 2004 South-Western POP QUIZ! Copies of quiz and answer key available for $1!!! I’ll even take an IOU. NO SHARING!!!
Copyright © 2004 South-Western
Reflection… Why were more students willing to buy the quiz answers the first time than the second time? In round 1, what type of good was the quiz answer key? In round 2, what type of good was the quiz answer key?
Copyright © 2004 South-Western The Free-Rider Problem A free-rider is a person who receives the benefit of a good but avoids paying for it.
Copyright © 2004 South-Western The Free-Rider Problem People can’t be excluded from enjoying the benefits of a public good; some may withhold paying for the g/s hoping others will. This prevents private markets from supplying public goods National Defense Basic Research Fighting Poverty
Copyright © 2004 South-Western Three of the Most Important Public Goods Why are these goods classified as public goods? What specific characteristics make each prone to the “free-rider” problem? Why do many economists support our government in providing these particular public goods? What are some potential problems?
Copyright © 2004 South-Western Solving the Free-Rider Problem Gov’t involvement when total benefits exceed the costs Involves cost benefit analysis: compares costs and benefits to society of providing a public good Why would this be a difficult job? Benefits must outweigh costs or no gov’t involvement Gov’t can increase efficiency by providing public good and paying for it with tax revenue
Copyright © 2004 South-Western The Difficult Job of Cost-Benefit Analysis It is difficult to do because of the absence of prices needed to estimate social benefits and resource costs. The value of life, the consumer’s time, and aesthetics are difficult to assess.
Copyright © 2004 South-Western Common Resources Common resources, like public goods, are not excludable, BUT, they ARE rival goods
Copyright © 2004 South-Western Tragedy of the Commons Common resources tend to be used excessively when individuals are not charged for their usage. Consider the story of “Town Common” “What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others.” - Aristotle This is similar to a negative externality. What can the government do to fix this market failure? Clean air and water Congested roads Fish, whales, and other wildlife
Copyright © 2004 South-Western CASE STUDY: Why Isn’t the Cow Extinct? Will the market protect me? Private Ownership and the Profit Motive!
Copyright © 2004 South-Western In Conclusion: The Importance of Property Rights The market fails to allocate resources efficiently when property rights are not well- established (i.e. some item of value does not have an owner with the legal authority to control it). When the absence of property rights causes a market failure, the government can potentially solve the problem.