Chapter 11: Public Goods and Common Resources

Free-Rider

A person who receives the benefit of a good but avoids paying for it A free-rider problem arises when the number of beneficiaries is large and exclusion of any one of them is impossible

Summary

1) Goods differ in whether they are excludable and whether they are rival in consumption. A good is excludable if it is possible to prevent someone from using it. A good is rival in consumption if one person's use of the good reduces others' ability to use the same unit of the good. Markets work best for private goods, which are both excludable and rival in consumption. Markets do not work as well for other types of goods. 2) Public goods are neither rival in consumption nor excludable. Examples of public goods include firework displays, national defense, and basic research. Because people are not charged for their use of the public good, they have an incentive to free ride, making private provision of the good untenable. Therefore, governments provide public goods, basing their decisions about the quantity of each good on cost-benefit analysis. 3) Common resources are rival in consumption but not excludable. Examples include common grazing land, clean air, and congested roads. Because people are not charged for their use of common resources, they tend to use them excessively. Therefore, governments use various methods to limit the use of common resources.

Private Goods

Excludable and Rival in consumption

Club Goods

Excludable but not rival in consumption

Examples of Club Goods

Fire protection, cable tv, uncongested toll roads

Examples of Common Resources

Fish in the ocean, whales and other wildlife, the environment, congested nontoll roads

Examples of Private Goods

Ice Cream Cones, Clothing, Congested toll roads

Why does the tragedy of the commons arise?

It arises because of an externality. When one family's flock grazes on the common land, it reduces the quality of the land available for other families. Because people neglect this negative externality when deciding how many sheep to own, the result is an excessive number of sheep

Public Goods

Neither Excludable nor rival in consumption

Common Resources

Rival in consumption, but not excludable

Difficulty of providing public goods`

The efficient provision of public goods is intrinsically more difficult than the efficient provision of private goods. When buyers of a private good enter a market, they reveal the value they place on it through the prices they are willing to pay. At the same time, sellers reveal their cost with the prices they are willing to accept. The equilibrium is an efficient allocation of resources because it reflects all this information. By contrast, cost-benefit analysts do not have nay price signals to observe when evaluating whether the government should provide a public good and how much to provide. Their findings on the costs and benefits of public projects are rough approximations at best

The Importance of Property Rights

The market fails to allocate resources efficiently because property rights are not well established. That is, some item of value does not have an owner with the legal authority to control it. For example, although no one doubts that the "good" of clean air or national defense is valuable, no one has the right to attach a price to it and profit from its use. A factory pollutes too much because no one charges the factory for the pollution it emits. The market foes not provide for national defense because no one can charge those who are defended for the benefit they receive

Examples of Public Goods

Tornado siren, national defense, uncongested nontoll road, basic research, government programs intended to help the poor

Tragedy of the Commons

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

Cost-Benefit Analysis

a study that compares the costs and benefits to society of providing a public good (done by economists and engineers for the government when assessing the feasability of a project)

Excludability

the property of a good whereby a person can be prevented from using it

Rivalry in Consumption

the property of a good whereby one person's use diminishes other people's use