Public Goods and Common Resources

1. Public Goods and Common Resources

2. Types of Goods • Excludability • Property of a good/service • Means I can stop someone from using it • Rivalry • Property of a good/service • Means if I use it, it takes away from someone else’s ability to use it

3. Types of Goods Rival in Consumption? Yes No Yes Excludable? No

4. Private Goods • 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

5. 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

6. 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

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

8. 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?

9. 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

10. Common Resources • Common Resources • 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

11. Example of Tragedy of the Commons: Fishing 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.

12. 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

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