Chapter 19 - Public goods and common resources. In this chapter you will learn: What the difference is between rival and excludable goods and services? What the free-rider problem is and what its consequences are? What the tragedy of the commons is and what its consequences are? How and when social norms, government regulation, and expansion of property rights can be used to solve problems with public goods or common resources?
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Chapter 19
Public Goods and Common Resources
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excludable goods and services
consequences are
its consequences are
regulation, and expansion of property rights
can be used to solve problems with public
goods or common resources
What will you learn in this chapter?
determine how goods are used and whether
they are allocated efficiently by markets:
– When a good is excludable, it is possible for sellers
to prevent its use by those who have not paid for
it.
– When a good is rival in consumption (or just rival),
one person’s consumption prevents or decreases
others’ ability to consume it.
Characteristics of goods
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Rival
Not rival
Excludable Not excludable
Four categories of goods and services based on
excludability and rivalry
Characteristics of goods
Many goods lack one or both of these characteristics.
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For each of the following, identify what kind of
good they are (private, public, artificially scarce,
or common resource):
1 Popular software.
2 AM/FM radio.
3 Street art.
4 A gaggle of geese.
5 A motorcycle.
Active Learning: Identify type of good
• Whether a good is excludable and rival in
consumption has important implications for how
it is allocated through a market system
– Common resources are goods that are not excludable
but are rival.
– Artificially scarce goods are excludable, but not rival.
• Markets work well for allocating private goods
efficiently, but not always so well for allocating
public goods and common resources
– Free-rider problem.
– Tragedy of the commons.
Allocation of goods
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• The free-rider problem starts when someone
decides to not pay for a public good and enjoys a
“free ride” from those that have paid
• The free-rider problem occurs when the
non-excludability of a public good leads to
undersupply due to a loss of revenue
– Free-riders enjoy positive externalities from others’
choices to pay.
• Under positive externalities, the equilibrium
quantity is less than the level that maximizes total
surplus
The free-rider problem
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(since they are rival), but they are
nonexcludable
– Nonexcludability causes demand to be higher than
if people had to pay for what they consumed.
– Rivalry causes quantity to dwindle.
commons; the depletion of a common
resource due to individually rational but
collectively inefficient overconsumption
The tragedy of the commons
Active Learning: Identifying the problem
For each of the following, identify whether it
suffers from a free-rider problem, a tragedy of
the commons problem, or neither
1 Earth’s atmosphere.
2 Children’s museum paid
by donations.
3 Common room microwave.
4 Litter at community parks.
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• The problem with undersupply of public goods
and overdemand for common resources leads to
an inefficient quantity of production and
consumption
• Solutions to these market failures fall under three
categories: social norms, government regulation
and provision, and private property rights
• Strong social norms help rebalance the trade-off
by imposing costs on people
– Social disapproval carries a higher cost in places where
people know each other and will interact with each
other in the future.
Dealing with public goods and common
resources
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• Government bodies can impose consumption limits or
make up for inadequate supply when individuals
cannot.
• Bans and quotas are applied to common-resource
problems to reduce the inefficiency created by overuse.
• Making something illegal is one way of changing the
trade-offs that people face.
– If the punishment is not severe, or the likelihood of getting
caught is low, the cost may not be high enough to change
the trade-off.
– Bans and quotas fail in situations where it is costly for
authorities to monitor and punish rule-breakers.
– Tough moral and practical questions come into play.
Dealing with public goods and common
resources
typical regulatory solution is government
provision
the efficient quantity is the one at which the
marginal social benefit equals the cost
provision:
– Calculating the marginal social benefit.
– How to finance the provision.
Bans, quotas, and government provision
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• In some cases, the most convenient solution to
public good and common resource problems is to
privatize the goods
• The patent system is an example of turning a
common resource (knowledge) into private
property
– It assures corporations that others will not be able to
free-ride on their innovations.
• Assigning property rights over common resources
is often far from simple
– Especially when many people are already using a
resource; it’s difficult to decide who owns what.
Property rights
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private property rights is through the use of
tradable allowances or permits
still limiting overall quantity to an efficient
level
Property rights
• When a good is excludable, those who haven’t
paid for it can be prevented from using it
• When a good is rival, one person’s consumption
prevents or decreases others’ ability to consume
it
• Private goods are both excludable and rival
• Public goods are neither excludable nor rival
• Common resources are rival, but not excludable
• Artificially scarce goods are excludable, but not
rival
Summary
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nonexcludability leading to undersupply of a
public good
of a common resource due to individually
rational but collectively inefficient
overconsumption
Summary
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• Strong social norms can help rebalance tradeoffs
in consuming public goods or common resources
– Imposes social costs on those who break the “rules” of
good behavior.
• Often, government bodies have the power to
solve the nonexcludability problem, while
individuals do not
– Bans and limits address overuse, but are inefficient
However, tradable allowances help to make them
efficient.
– Government provision addresses undersupply.
Summary
of the commons is to convert a common
resource into a private good
– This can be difficult when it is not possible to
divide a resource or when it is not clear how to do
so in a fair way.
individual incentives to manage use and
excludability
Summary