Chapter 19: Public Goods and Common Resources

Social norms

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.

Characteristics of goods

◦Excludability ◦Rivalry -A commodity may have 0, 1, or 2 of the characteristics

Tragedy of the Commons

The depletion of a common resource due to individually rational but collectively inefficient overconsumption. -Depletion of common resources ◦Nonexcludability causes demand to be higher than if people had to pay for what they consumed. ◦Rivalry causes quantity to diminish.

Free rider problem

-Occurs when someonedecides to not pay for a public good and enjoys a "free ride" from those that have paid. -)ccurs 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.

Four categories of goods

-Private goods (excludable and rival) -Common resources (non-excludable and rival) -Artifically scarce (excludable and non-rival) -Public goods (non-excludable and non-rival)

Three solutions to market failures

1. Social norms 2. Government regulation and provision 3. Private property rights

Property rights

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. -One common way that governments institute private property rights is through the use of tradable allowances or permits.

Tradable allowances or permits

They ensure that resources are allocated to those with the highest willingness to pay, while still limiting overall quantity to an efficient level.

Artificially scarce goods (club goods)

A good is artificially scarce or club good if it is non-rival but excludable. -Markets are efficient in producing these goods.

Common resource (common-pool resource)

A good is common resource if it is rival but non-excludable. -Markets are not efficient in producing these goods.

Private good

A good is private if it is rival and excludable -Markets are efficient in producing these goods.

Public goods

A good is public if it is non-rival and non- excludable. -Markets are not efficient in producing these goods.

Government intervention

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. ◦Potential shortcoming: it may be too costly to monitor the behavior and enforce the law

Excludability

It is possible for sellers to prevent its use by those who have not paid for it. -Goods may have different degrees of excludability -Costly

Rivalry

One person's consumption prevents or decreases others' ability to consume it. -Goods may have different degrees of rivalry. Sometimes many people can use a good but they bother each others.