1. Public Goods and Common Resources

2. By the end of this Section you should be able to: Define and Identify Public Good, Common Resource and Market Failure Explain and analyze the Free-Rider Problem Explain and analyze the Tragedy of the Commons Discuss solutions for the Free Rider problem and the Tragedy of the Commons

3. Why Study this? Usually from supply and demand analysis the market will produce the correct amount of a good. However, this is not always the case. Externality Public Good Common Resources Market failure is the inability of a market to produce a desirable product or produce it in the right amount.

4. What is a public good? Nonexcludable: if the good is produced, no one can be excluded from consuming it (available to everyone free of charge). Nonrival consumption: if one person consumes the good, that does not diminish the amount available for others Something of value which has no price to it.

5. Types of Goods NonrivalRival Non- excludable Pure Public Good Ex: National defense; streetlights; knowledge, tornado siren Common Resources Ex: groundwater, mineral deposits, Fish in a lake, environment ExcludableNatural Monopoly/Club goods Ex: toll roads; golf courses; Cable TV Private Goods Ex: Apple; other consumer goods

6. Was the group account in the game a public good? Is it nonexcludable? Yes! A contribution by any player produces an amount of the public good which is shared by everyone In this game, a contribution of one token by anyone means every member of the group consumes ½ of a token. Is it nonrival? Yes! If one member of the group consumes their share of the public good, that does not reduce anyone elses share.

7. What did the game show us about is the problem with public goods? Each individual maximizes her payoff by: Keeping all her tokens She earns 10 + group payoff Group welfare is maximized when: Everyone contributes all their tokens Each group member earns (4*endowment)*2) 4 = 20 each. Each person has an incentive to free ride but someone has to contribute to the group account for there to be something for them to get.

8. Free-Rider Problem Free Rider – a person who receives the benefit of a good but avoids paying for it. Because public goods are not excludable, it prevents the free- market from supplying them. Ex Firework display in a small town. No incentive for private market to provide it. Government ends up providing it taken out of taxes.

9. Solutions to the public goods free rider problem? Government intervention: Government uses its taxing authority to force people to contribute their fair share Voluntary organizations (if you can get the membership): Charitable organizations Community groups Clubs

10. Some Facts about the Game Stylized facts: Average contributions 40-60% of endowment in single-period games Contributions decline over time Even in final periods, contributions > 0% Economists free ride more What increases donations? Larger multiplier: contributions produce more of the public good Provision point: contributions are worthless unless a target is reached Refunds (in conjunction with provision point): contributions carry no risk Talking: moral suasion Leadership

11. Common Resources Common Resources goods that are rival (one persons use decreases the availability for use by others) but not excludable (they are available free of charge to anyone who wants them).

12. Problem with Common Resources Tragedy of the Commons: a dilemma arising from the situation in which multiple individuals acting in their own self-interest, will ultimately deplete a shared limited resource. Medieval town story What causes the tragedy: social and private incentives differ No one single family has the incentive to reduce the size of its own flock because each flock is only a small part of the problem. Other common resources: wildlife, congested roads, clean air and water

13. How do you solve the Tragedy of the Commons? Government intervention: Regulated flock size Taxing sheep Produce sheep grazing permits