Chapter 17: Public Goods and Common Resources

Solutions to problems with common resources

1. Pigouvian Taxes 2. The creation of a system of tradable licenses 3. The assignment of property rights

Private Good

A good that is both excludable and rival in consumption (Wheat, Bathroom Fixtures)

Overuse

A problem similar is a negative externality: the marginal social cost of an individual's use of a common resource is always higher than his or her individual marginal cost.

Artificially Scarce Goods

Excludable and Non-rival in consumption (On-demand movies, computer software) -No marginal costs -efficient price = 0

Non-rival in consumption

If more than one person can consume the same unit of the good at the same time

Rival in Consumption

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

Rationale for the presence of government

It allows citizens to tax themselves in order to provide public goods

Public Good

Non-excludable and non-rival in consumption (Public Sanitation and National Defense)

Common Resource

Non-excludable and rival in cosumption (Clean water, biodiversity)

Problem with common resources

Overuse - an individual does not take into account the fact that his or her use depletes the amount available for others.

Problem with artificially scarce good

Similar to natural monopoly

Cost-benefit analysis

What governments use to determine the efficient provision of a public good

Free-Rider Problem

When goods are non-excludable - some consumers will not pay for the good consuming what others have paid for and leading to inefficiently low production

Excludable Good

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

Non-excludable goods

When the supplier cannot prevent consumption by people who do not pay for it

If the use of common resources is determined by the free market, the resource:

Will be overused, since the marginal benefit will be equated to the marginal private cost of production which is less than the marginal social cost

The Marginal Social Benefit of a Public Good

is equal to the sum of the individual marginal benefits to each consumer

Marginal social benefit is greater than any one individual's marginal benefit so

no individual is willing to provide the efficient quantity

The efficient quantity of a public good

the quantity at which marginal social benefit equals the marginal cost of providing the good