Chapter 17: Public Goods and Common Resources

nonrival in consumption

A good is nonrival in consumption if more than one person can consume the same unit of the good at the same time.

rival in consumption

A good is rival in consumption if the same unit of the good cannot be consumed by more than one person at the same time. I consume the good is used up and you can't consume it.

All private goods are...

A good that is both excludable and rival in consumption Free markets can deliver efficient levels of production and consumption for private goods, which are both excludable and rival in consumption. When goods are nonexcludable or nonrival in consumption, or both, free markets cannot achieve efficient outcomes.

excludable

A good is excludable if the supplier of that good can prevent people who do not pay from consuming it. There is a way for us to figure out how to exclude you from consuming it.

nonexcludable

When a good is nonexcludable, the supplier cannot prevent consumption by people who do not pay for it.

Is public safety a public good?

Yes. Some (white people) benefit from public good (police) while others (black people) don't. Equally paying for them, but not equally benefiting from them.

In a market economy goods that are nonrival in consumption suffer from...

inefficiently low consumption.

markets cannot supply goods and services efficiently unless they are...

private goods—excludable and rival in consumption.

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.

Public goods

which are nonexcludable and nonrival in consumption, like a public sewer system A public good is nonexcludable and nonrival in consumption. In most cases a public good must be supplied by the government. The marginal social benefit of a public good is equal to the sum of the individual marginal benefits to each consumer. The efficient quantity of a public good is the quantity at which marginal social benefit equals the marginal cost of providing the good. Like a positive externality, marginal social benefit is greater than any one individual's marginal benefit, so no individual is willing to provide the efficient quantity.

Common resources

which are nonexcludable but rival in consumption, like clean water in a river or emergency room A common resource is rival in consumption but nonexcludable. It is subject to overuse, because an individual does not take into account the fact that his or her use depletes the amount available for others. This is similar to the problem of 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. Pigouvian taxes, the creation of a system of tradable licenses, or the assignment of property rights are possible solutions.

examples of public goods

1) Disease prevention. When doctors act to stamp out the beginnings of an epidemic before it can spread, they protect people around the world. 2) National defense. A strong military protects all citizens. 3) Scientific research. More knowledge benefits everyone.

Four Types of Goods

1) Private goods, which are excludable and rival in consumption, like wheat 2) Public goods, which are nonexcludable and nonrival in consumption, like a public sewer system 3) Common resources, which are nonexcludable but rival in consumption, like clean water in a river 4) Artificially scarce goods, which are excludable but nonrival in consumption, like on-demand movies on Netflix

If one or both of these characteristics are lacking, a market economy will not lead to efficient production and consumption of the good.

Because (1) private goods are excludable, producers can charge for them and so have an incentive to produce them. And because they are also (2) rival in consumption, it is efficient for consumers to pay a positive price—a price equal to the marginal cost of production.

overuse

Common resources left to the market suffer from overuse: individuals ignore the fact that their use depletes the amount of the resource remaining for others.

Cost-benefit analysis

Cost-benefit analysis is the estimation and comparison of the social costs and social benefits of providing a public good. One rationale for the presence of government is that it allows citizens to tax themselves in order to provide public goods. Governments use cost-benefit analysis to determine the efficient provision of a public good. Such analysis is difficult, however, because individuals have an incentive to overstate the good's value to them.

free-rider problem

Goods that are nonexcludable suffer from the free-rider problem: many individuals are unwilling to pay for their own consumption and instead will take a "free ride" on anyone who does pay. When goods are nonexcludable, there is a free-rider problem: some consumers will not pay for the good, consuming what others have paid for and leading to inefficiently low production. When goods are nonrival in consumption, they should be free, and any positive price leads to inefficiently low consumption.

When you driving on the highway impacts someone else negatively that is called..

an externality

nonexcludable goods suffer from...

inefficiently low production

Artificially scarce goods

which are excludable but nonrival in consumption, like on-demand movies on Netflix Artificially scarce goods are excludable but nonrival in consumption. Because no marginal cost arises from allowing another individual to consume the good, the efficient price is zero. A positive price compensates the producer for the cost of production but leads to inefficiently low consumption. The problem of an artificially scarce good is similar to that of a natural monopoly.