1. Chapter 17 Public Goods and the Tragedy of the Commons

2. Market Equilibrium and Types of Goods
Equilibrium in a free market yields a number of important results.
Goods must be produced at the lowest possible cost.
Goods must satisfy the highest valued demands.
Total surplus (consumer plus producer surplus) is maximized.
Some types of goods, however, may not yield these results.
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3. Market Equilibrium and Types of Goods
Goods can be classified into different categories based on the following properties:
When a person can cheaply be prevented from using a good, it is Excludable.
When a person cannot cheaply be prevented from using a good, it is Non-excludable.
When one person’s use of a good reduces the ability of another person to use the same good, it is Rival.
When one person’s use of a good does not reduce the ability of another person to use the same good, it is Non-rival.
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4. Market Equilibrium and Types of Goods
Given these characteristics, all goods fall into one of the following categories:
Private Goods
Public Goods
Nonrival Public Goods
Common Resources
Each of these types of goods will have significant implications for market equilibrium.
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5. Private Goods Private Goods are excludable and rival.
Most goods are private goods.
Private goods can be efficiently provided in competitive markets.
Since private goods are excludable, there is a strong incentive to pay for and thus to produce these goods.
Furthermore, since the goods are rival, excludability does not lead to inefficiency.
The only people excluded from consuming a private good in a competitive market are those who are not willing to pay the costs of production.
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6. Public Goods are non-excludable and non-rival.
Since public goods are non-excludable, it is difficult to get people to pay for them voluntarily.
Additionally, non-rivalry implies that production costs do not significantly change with additional users.
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7. Free riders can disrupt market efficiency.
Public Goods
Given the nature of public goods, consumers have little incentive to pay for them.
A Free Rider enjoys the benefits of a public good without paying a share of the costs.
Free riders can disrupt market efficiency.
With a sufficient number of free riders, public goods will be underprovided by the market.
Students will easily recognize this concept when asked about any group projects they may have worked on in other classes. Without doubt they will be able to identify one group member who did absolutely nothing but still got a high grade like everyone else in the group.

8. Public Goods
Failure to provide public goods at the optimal level can create substantial costs.
Thus, the need to produce public goods provides a strong argument for taxation and government provision.
By taxing everyone and producing the public good, government can make people better off.
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9. Public Goods
Just because everyone can be made better off with taxation and government provision does not mean that everyone will be made better off.
Some people may want more of the public good while some may want less. Some people, in fact, may want none.
A Forced Rider is someone who pays a share of the costs of a public good (through taxation) but who does not enjoy the benefits.
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10. Public Goods
If the government provides the public good, how much of it should the government produce?
Ideally, the government should produce the amount that maximizes total surplus (i.e., the total benefits of the public goods minus the total costs).
In practice this could be quite problematic.
The total benefit of a public good, for example, is the sum of the benefits to each individual.
How much each person values the good will not be known to the government.
Voting and other democratic processes can help to produce optimal amounts of public goods.
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11. What happens if government provides more of a public good than is efficient? Who is hurt? Who benefits? Use national defense as an example.
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12. Nonrival Public Goods are goods that are excludable but non-rival.
Markets can provide these goods but do so at an inefficient level.
Some consumers may be willing to pay the marginal cost of production, but these goods tend to be priced at a much higher level.
Premium cable channels are a good example that students should identify with. The Marginal Cost of airing programming to another subscriber is probably close to zero but the subscription cost is usually quite higher in an effort to recoup fixed costs. Most economists view the inefficiency of marketable public goods is offset by the diversity and creativity associated with these goods.

13. Common Resources are goods that are non-excludable but rival.
Consumers cannot be excluded from consuming these goods, but when anyone consumes a unit of a common resource, there is one less unit of the resource for everyone else.
Thus, there is a strong incentive to consume these resources before others resulting in overuse.
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14. Types of Goods
Table 17.1: Four Types of Goods

15. Many airports have pay-for Wi-Fi. Why don’t they offer free Wi-Fi?
Could advertising be used to pay for the upkeep of public parks? Where would the advertising be seen?
Many airports have pay-for Wi-Fi. Why don’t they offer free Wi-Fi?
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16. The Tragedy of the Commons
The Tragedy of the Commons is the tendency for any good which is rival and non-excludable to be overused and undermaintained.
Since common resources are typically not owned, it is difficult to prevent anyone from gathering these goods.
Rivalry implies that when one person procures a common resource, a smaller amount of the good is available to everyone else.
As such, each individual has the incentive to gather the common resource before others.
The end result of this behavior is that the common resource will disappear.
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17. The Tragedy of the Commons
Common resources like bison, elephants, fish, forests, and other wildlife can be subject to the tragedy of the commons.
These resources must be carefully maintained to remain useful, but there is little incentive for users to invest in maintenance.
The tragedy of the commons can be viewed as a type of externality where any investment in maintenance by an individual user provides an external benefit to others.
Students may need to be reminded of positive externalities.

18. The Tragedy of the Commons
Sustainable Catch
Year
Stock
Natural Growth Rate (%)
Annual Catch 1
100 10 2 3 4 5 6 7 8 9
Appendix: Sustainable Catch
In this scenario, the annual catch equals the amount of fish that are naturally reproduced. This level of fishing is sustainable in that the stock of fish stays the same each year.

19. The Tragedy of the Commons
Overfishing and Extinction
Year
Stock
Natural Growth Rate (%)
Annual Catch 1
100 10 20 2 90 3 79 4 67 5 54 6 39 7 23 8 9
< 0
Appendix: Overfishing and Extinction
In this scenario, the fisherman doubles his annual catch. This level of fishing is not sustainable since the annual catch exceeds the amount of fish that are naturally reproduced. The stock of fish will be depleted by year 9.

20. The Tragedy of the Commons
Some solutions to the tragedy of the commons:
Social customs
Government regulations
Tradeable allowances
Unclear property rights can make all solutions for the tragedy of the commons difficult to implement.
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21. Case Study: The Tragedy of Overfishing
Fish in the ocean are clearly an example of a common resource.
Since 1960 the tuna catch has decreased by 75%.
Other types of fish are facing similar trends – overfishing is draining the oceans of fish.
Since fishing involves lots of unrelated people from different countries, social norms are not particularly effective methods to reduce overfishing.
Governments have also tried command and control regulations like limiting the number of fishing boats to no avail.
The text mentions a 2006 paper in Science estimating that all of the world’s major seafood stocks will collapse by 2048 if existing trends in fishing continued. Students should be reminded of the notion of transaction costs discussed in the Coase Theorem as social norms will probably only work in small groups. Fishermen got around a British Columbia 1968 regulation limiting the number of fishing boats by making their boats more efficient or “capital stuffing” their fleet with high technology engines and electronics allowing for a greater catch.

22. Case Study: The Tragedy of Overfishing
Instructor Notes: Figure 17.1: Where’s the Catch?
Source: Commission for the Conservation of Southern Bluefin Tuna

23. Case Study: The Tragedy of Overfishing
In 1986 New Zealand pioneered an alternative approach.
Individual Transferable Quotas (ITQs) provides the owner with the right to catch a certain tonnage of fish.
The sum of the ITQs adds up to the Total Allowable Catch set by the government.
ITQs can be bought and sold.
Furthermore, the government does not restrict the types of boats or equipment that fishermen can use.
The system has been extremely successful.
ITQs are very similar to tradeable permits discussed as a solution to negative externalities. It should be noted that most of the New Zealand fish live and spawn within official New Zealand waters. An ITQ system related to migratory fish would require multinational agreement which could involve significant transaction costs.

24. Case Study: The Tragedy of Overfishing
Figure 17.2: A Tragedy Prevented by Property Rights
Source: Fishery Statistics: Food and Agriculture Organization of the United Nations
It should be noted that most of the New Zealand fish live and spawn within official New Zealand waters. An ITQ system related to migratory fish would require multinational agreement which could involve significant transaction costs.

25. Why do small communities find it easier to deal with common resource problems than a state or a country?
Why is the establishment of property rights a key way to solve the problem of some common resources?
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26. Equilibrium in a free market yields a number of important results.
Goods must be produced at the lowest possible cost.
Goods must satisfy the highest valued demands.
Total surplus (consumer plus producer surplus) is maximized.
Some types of goods, however, may not yield these results.
A good’s type will depend on whether people can be excluded from consuming it and whether the good is rival in consumption.
Instructor Notes:

27. Private Goods are excludable and rival.
Public Goods are non-excludable and non-rival.
Nonrival Public Goods are excludable but non-rival.
Common Resources are non-excludable but rival.
Competitive markets can only efficiently provide private goods.
The Tragedy of the Commons is the tendency for any good which is rival and non-excludable to be overused and under maintained.
The Tragedy of the Commons can explain many environmental problems facing the world today.
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