Chapter 11 - Public Goods and Common Resources

Chapter Summary

- 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 a good reduces the other's 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. - Public goods are neither rival in consumption nor excludable. Examples of public goods include fireworks displays, national defense, and the discovery of fundamental knowledge. Because people are not charged for their use of the public good, they have the incentive to free ride, making the private provision of the good untenable. Therefore, governments provide public goods, basing their decision about the quantity of each good on the cost-benefit analysis. - 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, such as regulations and corrective taxes, to limit the use of common resources.

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.

Free Rider

A person who receives the benefit of a good, but avoids paying for it.

Cost-Benefit Analysis

A study that compares the costs and benefits to society of providing a public good.

Common Resources

Goods that are rival in consumption, but not excludable.

Public Goods

Goods are neither excludable nor rival in consumption.

Private Goods

Goods that are both excludable and rival in consumption.

Club Goods

Goods that are excludable, but not rival in consumption.

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.