Public Goods

Artificially scarce goods in the market

Artificially scarce goods face a problem in markets. As long as a good is excludable, it is possible to earn a profit by making it available to only those who pay. But if Netflix actually charges $4 for movies, viewers will consume the good only up to the point where their marginal benefit is $4. So in a market economy goods that are non-rival in consumption suffer from inefficiently low consumption.

Government supply of public goods

As a last resort when the other options fail, it is up to the government to provide public goods

Assigning property rights for common goods

At a fundamental level, common resources are subject to overuse because nobody owns them. The essence of ownership of a good- the property right over which is the good- is that you can limit who can use and cannot use the good as well as how much of it can be used.

Common Resources in the Market

Because common resources are nonexcludable, individuals cannot be charged for their use. Yet, because they are rival in consumption, an individual who uses a unit depletes the resource by making that unit unavailable to others. As a result, a common resource is subject to overuse: an individual will continue to use it until his or her marginal benefit of its use is equal to this or her own individual marginal cost, ignoring the cost that this action inflicts on this society as a whole.

common resources and negative externalities

Because common resources pose problems similar to those created by negative externalities, the solutions are also similar. To ensure efficient use of a common resource, society must find a way of getting individual users of the resource to take into account the costs they impose on other users.

License system for common goods

Create a system of tradable licenses for the use of the common resource much like the systems designed to address negative externalities. The policy maker issues the number of licenses that corresponds to the efficient level of use for that good. Making the licenses tradable ensures that the right to use the good is allocated efficiently- that is, those who end up using the good are those who gain the most from its use

Cost-benefit analysis

How do governments decide in practice how much of a public good to provide?Governments try to estimate and compare both the social benefits and the social costs of providing a public good, a process known as cost-benefit analysis Because people don't actually pay for public goods, its much harder to determine the societal benefit from them. With private goods its easy because they have a willingness to pay involved

Private goods

excludable and rival in consumption, like wheat

Public Goods

nonexcludable and nonrival in consumption, like a public sewer system

Excludable Goods

suppliers of the good can prevent people who don't pay from consuming it

Marginal Social Benefit of a Public Good

In the special case of a public good, the marginal social benefit of a unit of the good is equal to the sum of the individual marginal benefits that are enjoyed by all consumers of that unit. This is because a public good is nonrival in consumption-so different people's benefit from the same public good do not affect others.

Private Goods in Markets

Markets cannot supply goods and services efficiently unless they are private goods- excludable and rival in consumption. If a good is nonexcludable, self-interested consumers won't be willing to pay for it- they will take a "free ride" on anyone who does pay. Even though consumers would benefit from increased production of the good, no one individual is willing to pay for more, and so no producer is willing to supply it. The result is that nonexcludable goods suffer from inefficiently low production in a market economy.

Taxing common goods

Pigouvian taxes can also be used to reduce a common resource to the efficient quantity. For example, some countries have imposed "congestion charges" on those who drive during rush hour, in effect charging them for use of the common resource of city streets.

Ways to internalize common resources

There are three fundamental ways to induce people who use common resources to internalize the costs they impose on others: Tax or otherwise regulate the use of the common resource, create a system of tradable licenses for the right to use the common resource, make the common resource excludable and assign property rights to some individuals.

How much of a public good should be provided?

When the willingness to pay for an additional unit of a public good is known, as well as the individual marginal benefit from another unit of the public good, this information plus information on the cost of providing the good can allows the government to use marginal analysis to find the efficient level of providing the public good: the level at which the marginal social benefit of the public good is equal to the marginal cost of producing it.

Public Goods in the market

a good that is both non-excludable and non-rival in consumption. Public goods suffer from the free-rider problem, so no private firm would be willing to produce them

Rivals in consumption

the same unit of the good cannot be consumed by more than one person at the same time.

Supply of Public Goods

voluntary contributions (Example: private donations support a considerable amount of scientific research), self-interested individuals or firms (because those who produce them are able to make money in an indirect way. Ex: Broadcast TV, which in the US is supported entirely by advertising.), some potentially public goods are deliberately made excludable (and therefore subject to charge, like on-demand movies). Public goods can also be brought around by social pressures (such as volunteer fire departments. As communities grow larger social pressure becomes increasingly difficult to apply)

Artificially Scarce Goods

which are excludable but nonrival in consumption, like on-demand movies.

Common Goods

which are nonexcludable but rival in consumption, like clean water in a river