Chapter 11: Public Goods and Common Resources

important Common Resources

Clean air and water Congested roads Fish, whales, and other wildlife

Private Goods

Are both excludable and rival

Club Goods

Are excludable but not rival

Public Goods

Are neither excludable nor rival Gives rise to positive externalities

Common Resources

Are rival but not excludable Gives rise to negative externalities

important Public Goods

National Defense Basic Research Fighting Poverty

Solving the Free-Rider Problem

The government can decide to provide the public good if the total benefits exceed the costs The government can make everyone better off by providing the public good and paying for it with tax revenue

Disadvantages of government provision of a public good

The government does not know the exact willingness of consumers to pay for the public good. Taxpayers do not agree on the optimal quantity of the public good that the government should provide.

THE IMPORTANCE OF PROPERTY RIGHTS

The market fails to allocate resources efficiently when property rights are not well-established. When the absence of property rights causes a market failure, the government can potentially solve the problem.

"externalities arise because something of value has no price attached to it" is associated with

both public goods and common resources.

Tragedy of the Commons: Government

can solve the problem Regulation or taxes to reduce consumption of the common resource Turn the common resource into a private good

Goods that are rival in consumption include

common resources and private goods.

A good is excludable

if it is possible to prevent someone from using it

A good is rival

if one person's enjoyment of the good prevents other people from enjoying the same unit of the good.

Tragedy of the Commons

is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.

free-rider

is a person who receives the benefit of a good but avoids paying for it

Public goods are

neither rival nor excludable.

The free-rider problem

prevents private markets from supplying public goods. exists for any good that is not excludable.

Governments provide

public goods, making quantity decisions based upon cost-benefit analysis.

Cost benefit analysis

refers to a study that compares the costs and benefits to society of providing a public good

Excludability

refers to the property of a good whereby a person can be prevented from using it

Rivalry

refers to the property of a good whereby one person's use diminishes other people's use.

Ways for the government to solve the problem of excessive use of common resources

regulation taxes turning the common resource into a private good

Common resources are

rival but not excludable, Because people are not charged for their use of common resources, they tend to use them excessively Governments tend to try to limit the use of common resources

A common theme among examples of market failure is

some item of value does not have an owner with the legal authority to control it.

A cost-benefit analysis would be used to estimate

the total costs and benefits of the project to society as a whole