ECO2023 Ch 11 Public Goods and Common Resources

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What does it mean to say that a good is excludable?

It means that those who do not pay for the good can be excluded from consuming it.

Which of the following is an example of a public good?

National defense

When goods do not have a price, which of the following primarily ensures that the good is produced?

government

When a good is rival in consumption,

one person's use of the good diminishes another person's ability to use it.

Common resources are

overused in the absence of government.

Knowledge is an example of a

public good.

A free rider is a person who

receives the benefit of a good but avoids paying for it.

Refer to the table. Consider the island of Moreau, which has four families, the Washington family, the Xavier family, the Yollo family, and the Zed family. The island does not currently have any playground equipment, and the families are considering the idea of contributing to a pool of money that will be used to buy up to 4 pieces of equipment. The table above shows each family's willingness to pay for each piece of playground equipment. Suppose the cost of a piece of playground equipment is $500 and the four families have agreed to split the equipment costs equally. If the families vote to determine how many pieces of equipment to buy, basing their decision solely on their willingness to pay (and trying to maximize their own surplus), what is the largest number of pieces of equipment for which at least 3 families would vote "yes"?

3 When the cost of a piece of playground equipment is $500, each family has to pay $125 per piece of equipment. For the third piece of equipment, the willingness to pay exceeds $125 for the Xavier, Yollo, and Zed families, while for the fourth piece of equipment, it exceeds the willingness to pay for only the Xavier and Yollo families. As a result, three is the largest number of pieces of equipment for which at least 3 families would vote "yes"

Why is it difficult for private industry to provide public goods?

Because public goods are not excludable, the free-rider problem makes it unprofitable for private industry to produce public goods.

The statement that "externalities occur because something valuable is unpriced" is true for

Both public goods and common resources Both public goods and common resources are not excludable; as a result, they are available to everyone without a price. As a result, the provision of public goods results in people receiving a benefit without paying for it-a positive externality. Meanwhile, because the use of a common resource causes its use to be diminished for other people, other people suffer a loss without being compensated-a negative externality

Broadcast television and broadcast radio send out signals that can be received by an infinite number of receivers without reducing the quality of the reception of other consumers of the signal and it is not possible to charge any of the consumers of the signal. What type of good (private, public, common resource, club good) is this newer type of television and music provision?

Club good because it is not rival in consumption but is excludable.

Public basketball courts

Common Resource Public basketball courts are common resources. They are not excludable because anyone can play basketball in it. But they are rival in consumption, because once a party occupies a court, the other party cannot play in it until the first party leaves.

Which of the following is an example of a common resource?

Fish in the ocean

Suppose each of 20 neighbors on a street values street repairs at $3,000. The cost of the street repair is $40,000. Which of the following statements is true? It is not efficient to have the street repaired. It is efficient for each neighbor to pay $3,000 to repair the section of street in front of his home. It is efficient for the government to tax the residents $2,000 each and repair the road. None of the above is true.

It is efficient for the government to tax the residents $2,000 each and repair the road.

Broadcast television and broadcast radio send out signals that can be received by an infinite number of receivers without reducing the quality of the reception of other consumers of the signal and it is not possible to charge any of the consumers of the signal. Is this type of good normally provided by private industry? Why or why not?

No, because it is not profitable to produce a good for which nonpayers cannot be excluded from consuming it.

Suppose the value of a human life is $10 million. Suppose the use of airbags in cars reduces the probability of dying in a car accident over one's lifetime from 0.2 percent to 0.1 percent. Further, suppose that a lifetime supply of airbags will cost the average consumer $12,000. If these numbers were accurate, would it be efficient for the government to require airbags in cars? Why or why not?

No, because the expected benefit from airbags is (0.2-0.1) * $10,000,000 =$10,000 while the cost is $12,000.

Were the buffalo hunters who almost made the buffalo extinct behaving irrationally? Explain.

No. Because the buffalo were a common property resource, the buffalo were free. Each hunter pursued his own best interest but failed to take into account the impact of his actions on other people.

Rural roads

Public Good Rural roads are public goods. They are not excludable, and they are not rival in consumption because they are uncongested.

Many transportation systems, such as the Washington, D.C. Metro (subway), charge higher fares during rush hours than during the rest of the day. True or False: They charge higher fares during rush hour because when the system is congested, each additional rider imposes costs on other riders.

True When the system is congested, each additional rider imposes costs on other riders. For example, when all seats are taken, some people must stand. Or if there isn't any room to stand, some people must wait for a train that isn't as crowded. Increasing the fare during rush hour internalizes this negative externality imposed on other riders.

How is a streetlight (a public good) related to a positive externality?

When people consider buying a streetlight, they fail to consider the external benefit it would provide to others and only consider their personal benefit. Thus, there is an underproduction and consumption of both public goods and goods that generate positive externalities.

A congested toll road is

a private good

A private good is

both rival in consumption and excludable

The parable called the Tragedy of the Commons applies to goods such as

clean air and clean water.

A community soccer field that anyone can use without charge but for which teams have to wait their turn to use would be an example of a

common resource Because anyone can use it without charge, the soccer field is not excludable. Because the field can't be used by more than two teams at a time, the soccer field is rival in consumption. A good that is not excludable but rival in consumption is a common resource.

The Tragedy of the Commons is a parable that illustrates why

common resources are overconsumed.

If the government decides to build a new highway, the first step would be to conduct a study to determine the value of the project. The study is called a

cost-benefit analysis.

A large number of people benefit from good X, and excluding an individual from those benefits is impractical. Good X will

likely suffer from the free-rider problem Free-riding can only occur when an individual cannot be excluded from the benefit of a good. The larger the number of people who benefit from a good, the more likely that an individual will go unchallenged as a free-rider

The more highly a community values a human life, the (?) likely it is for an installation project of a traffic light to pass the cost-benefit analysis.

more When a community considers whether to install a traffic light, it has to compare the cost with the benefit of increased safety. In this process, it must estimate the value of a human life by considering the opportunity cost of losing a life. As a result, the more highly a community values a human life, the more likely it is for the benefit to exceed the cost in the cost-benefit analysis.

A textbook is a

private good and the knowledge that one gains from reading the book is a public good.

Free riding is least likely to occur with which type of good?

private goods Free riding occurs with public goods because they are nonexcludable and nonrival in consumption. Private goods are the polar opposite: excludable and rival in consumption. As a result, private goods are the least likely to generate free riding.

Which categories of goods are excludable?

private goods and club goods

Which categories of goods are rival in consumption?

private goods and common resources

Markets fail to allocate resources efficiently when

property rights are not well established.

Public goods are difficult for a private market to provide due to

the free-rider problem

If good x is available free of charge, then

the private market cannot ensure an efficient allocation of resources in the market for good x.

Flu vaccine

Private Good Flu vaccine is a private good. It is excludable and rival in consumption, because giving flu vaccine to one individual means less will be available to others.

Consider the rivalry in consumption and excludability of each of the following goods. Use this information to determine whether the goods are public goods, private goods, common resources, or club goods. Explain. Fish in a private pond

Rival in consumption and excludable, private good. Only one can eat a fish. Because it is private, nonpayers can be excluded from fishing.

Rival in consumption but not excludable, common resource. Additional cars reduce the benefits of current users, but they cannot be forced to pay for the use of the highway.

Rival in consumption but not excludable, common resource. If one eats the hot dog, another cannot. However, once provided, partygoers cannot be charged for eating the hot dogs.

If a person can be prevented from using a good, the good is said to be

excludable

Suppose that requiring motorcycle riders to wear helmets reduces the probability of a motorcycle fatality from 0.3 percent to 0.2 percent over the lifetime of a motorcycle rider and that the cost of a lifetime supply of helmets is $500. It is efficient for the government to require riders to wear helmets if human life is valued at

$500,000 or more

How are fish in the ocean (a common resource) related to a negative externality?

A common resource is free so it is overconsumed. Each consumer of fish fails to take into account the negative impact on others of their consumption causing overuse of the resource from a social perspective.

Broadcast television and broadcast radio send out signals that can be received by an infinite number of receivers without reducing the quality of the reception of other consumers of the signal and it is not possible to charge any of the consumers of the signal. Private companies have been providing broadcast television and radio since the invention of the medium. How do they make it profitable if they cannot charge the recipient of the signal?

Broadcasters charge advertisers for the commercials they show during the broadcasters' programming. That is why it is called commercial television or commercial radio.

Why did buffalo almost become extinct while cows (a similar animal) are unlikely to ever become extinct?

Buffalo were a common resource and over-consumed. Cows are private goods and are produced and sold at the socially efficient price and quantity.

Broadcast television and broadcast radio send out signals that can be received by an infinite number of receivers without reducing the quality of the reception of other consumers of the signal and it is not possible to charge any of the consumers of the signal. What are the "recent" alternatives to traditional commercial television and commercial radio?

Cable television, pay-per-view television, online streaming services, TV shows on DVD, cable music included with cable television, and satellite radio.

Museums that require admission fee

Club Good Museums that require admission fee is a club good. It is excludable and not rival in consumption because additional visitors will not reduce the amount of exhibits available

A dock on a lake that is open to the public

Common Resource A good that is rival in consumption and nonexcludable is a common resource. In this case, a dock on a lake that is open to the public is rival in consumption since two people cannot use the dock at the same time. However, it is nonexcludable since anyone is free to use the lake.

Public swimming pools with free admission during summer

Common Resource Public swimming pools with free admission during summer are common resources. They are not excludable but are rival in consumption because every additional swimmer makes the pools more crowded.

(?) are generally associated with negative externalities. The problem associated with these goods is known as (?)

Common resources; the Tragedy of the Commons Common resources are generally associated with negative externalities. Because common resources are rival in consumption but not excludable, the use of the common resources by one person reduces the amount available for others. Because common resources are not priced, people tend to overuse them—their private cost of using the resources is less than the social cost. The problem that arises from these negative externalities is known as the Tragedy of the Commons. Examples include fish in the ocean, the environment, congested nontoll roads, the town commons, and congested parks

A positive externality affects market efficiency in a manner similar to a

public good

T/F The socially optimal price for a fishing license is zero.

FALSE a positive price is optimal so that the price reduces the quantity demanded of fish to the socially optimal level.

T/F The government should continue to spend to improve the safety of our highways until there are no deaths from auto accidents.

FALSE at some point, the cost of increasing safety (reducing highway deaths) exceeds the value of a life.

T/F If the city government sells apples at a roadside stand, the apples are public goods because they are provided by the government.

FALSE goods are categorized as public or private based on their characteristics, not who provided them, so an apple sold to a consumer is private regardless of who provided the apple.

T/F A public good is both rival in consumption and excludable.

FALSE it is neither rival in consumption nor excludable.

T/F A common resource is neither rival in consumption nor excludable.

FALSE it is rival in consumption but not excludable.

T/F National defense is a classic example of a common resource.

FALSE national defense is an example of a public good.

T/F When the government uses cost-benefit analysis to decide whether to provide a public good, the potential benefit of the public good can easily be established by surveying the potential consumers of the public good.

FALSE quantifying benefits is difficult and respondents have little incentive to tell the truth.

T/F Club goods are free to the consumer of the good.

FALSE they are excludable so a price must be paid to receive them, but they are not rival in consumption, so they can be enjoyed by many at the same time.

Food is more important than roads to the public, yet the government provides roads for the public and rarely provides food. Why?

Food is both rival in consumption and excludable, so it can be efficiently provided by the private market. Roads are often neither rival in consumption nor excludable, so they will not be provided by private markets and may be most efficiently provided by government.

Not rival in consumption and not excludable, public good. Additional cars can travel the road without reducing the benefit to other consumers, and the additional cars cannot be forced to pay for the road.

Not rival in consumption and not excludable, public good. Additional viewers can turn on their televisions without reducing the benefits to other consumers and nonpayers cannot be excluded.

Not rival in consumption and not excludable, public good. Once discovered, additional people can benefit from the knowledge without reducing the benefit to other consumers of the knowledge, and once in the public domain, nonpayers cannot be excluded.

Not rival in consumption but excludable, club good. Additional cars do not reduce the benefits to current users, but they can be excluded if they don't pay the toll.

Not rival in consumption but excludable, club good. Additional users of the knowledge could use it without reducing the benefit to other consumers; therefore, it is not rival. If a patent can be obtained, no one else can produce the anti-cholesterol pill, so it is excludable.

Not rival in consumption but excludable, club good. More houses can be wired without reducing the benefit to other consumers, and the cable company can exclude nonpayers.

How can the establishment of individual property rights eliminate the problems associated with a common resource?

People overuse common resources because their benefit is positive and their cost is zero. If ownership over the resource exists, the cost of using the resource is realized and a socially optimal price is generated.

A new drone that you take turns flying with your friends

Private Good A good that is rival in consumption and excludable is a private good. In this case, your new drone is rival in consumption because two people cannot fly it at the same time. It is also excludable because you, as the owner, can prevent anyone else from using it. The fact that you choose to fly the drone with your friends does not affect your drone's classification as a private good.

A large, beautiful clock in a town square

Public Good A good that is both nonrival in consumption and nonexcludable is a public good. In this case, looking at the clock does not diminish anyone else's ability to do the same, so the clock is nonrival in consumption. It is also nonexcludable because, given its location in a public space, it's impossible to prevent a person from looking at it.

Public good. A broadcast signal is not rival in consumption and not excludable.

(?) are generally associated with positive externalities. The problem that arises from these externalities is known as (?)

Public goods; the free-rider problem Public goods are generally associated with positive externalities. Because the benefits from the public good received by one person do not reduce the benefits received by anyone else, the social value of public goods is substantially greater than the private value. Because public goods are not excludable, the free-market quantity is zero, so it is less than the efficient quantity. The problem that arises from these positive externalities is known as the free-rider problem. Examples include national defense, knowledge, uncongested nontoll roads, and uncongested parks.

Rival in consumption and excludable, private good. If one eats the hot dog, another cannot. Even though it is supplied by the government, it is being sold, so nonpayers can be excluded.

Rival in consumption but not excludable, common resource. Only one can eat a fish but the ocean is not privately owned, so nonpayers cannot be excluded.

T/F A fireworks display at a private amusement park is a good provided by a natural monopoly.

TRUE

T/F An apple sold in a grocery store is a private good.

TRUE

T/F Common resources are overused because common resources are free to the consumer.

TRUE

T/F Common resources are related to negative externalities because consumers of common resources ignore the negative impact of their consumption on other consumers of the common resource.

TRUE

T/F If someone owned the property rights to clean air, that person could charge for the use of the clean air in a market for clean air, and thus, air pollution could be reduced to the optimal level.

TRUE

T/F Private markets have difficulty providing public goods due to the free-rider problem.

TRUE

T/F Public goods are related to positive externalities because the potential buyers of public goods ignore the external benefits those goods provide to other consumers when they make their decision about whether to purchase public goods.

TRUE

What type of problem are hunting and fishing licenses intended to relieve? Explain.

The overconsumption of common resources. Because common resources are free, people use them excessively. Selling a limited number of hunting or fishing licenses restricts the number of users.

A negative externality affects market efficiency in a manner similar to

a common resource

A person who regularly watches public television but fails to contribute to public television's fundraising drives is known as

a free rider

Which of the following is an example of general knowledge, as opposed to specific knowledge that can be patented? a physics theorem the chemical formula for a breakthrough drug the invention of a puncture-resistant soap bubble a method for making a no-skid tire

a physics theorem Specific technical knowledge, like the method for making a no-skid tire, a puncture-resistant soap bubble, or the chemical formula for a drug, is patentable, while general knowledge like a physics theorem is not.

Which of the following are potential solutions to the problem of air pollution? auction off pollution permits grant rights of the clean air to citizens so that firms must purchase the right to pollute regulate the amount of pollutants that firms can put in the air all of the above

all of the above

A pizza is

excludable and rival in consumption.

It would always be a mistake to view

internet access without a password as a club good. A club good is defined as a good that is excludable but nonrival in consumption, while internet access without a password is not excludable and may be rival in consumption, as one person's use can, by decreasing transmission speeds, limit its usefulness

A public good is

neither rival in consumption nor excludable.

A large, lightly-used pool at a private resort is an example of a

nonrival but excludable good A pool at a private resort is excludable, and because it is large and lightly used, one person's use doesn't diminish another person's use, so the pool is also nonrival.

A mathematical theorem can be used by anyone without diminishing its use by someone else. For this reason, we say that a mathematical theorem is

not rival in consumption When a good can be used without diminishing its use by someone else, it is not rival in consumption. While mathematical theorems are also, in general, not excludable, whether a good is not excludable depends on whether a person can be prevented from using it, not on the impact of their use

A club good is

not rival in consumption but excludable

Cost-benefit analysts often encounter the problem that those who would benefit from government provision of a public good tend to

overstate the benefit they would receive from the public good and those who would be harmed by government provision of a public good tend to overstate the costs they would incur from the public good.

Because of the free-rider problem,

private markets tend to underallocate resources to the production of public goods. Free-riding occurs when people benefit from a good but don't pay for it. As a result, these goods are unprofitable for firms to produce even though the demand for them would make them attractive markets otherwise. As a result, private markets do not produce the efficient level of goods that suffer from the free-rider problem, resulting in an underallocation of resources.

When governments employ cost-benefit analysis to help them decide whether to provide a public good, measuring benefits is difficult because

respondents to questionnaires have little incentive to tell the truth

A common resource is

rival in consumption but not excludable.

If one person's consumption of a good diminishes other people's use of the good, the good is said to be

rival in consumption.

When markets fail to allocate resources efficiently, the ultimate source of the problem is usually

that property rights have not been well established

The overuse of a common resource relative to its economically efficient use is called

the Tragedy of the Commons.

Public goods are

underprovided in the absence of government.

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