19 Public Goods and Common Resources Lecture

[Pages:10]Public Goods and Common Resources

November 28, 2006

Reading: Chapter 20

This topic examines public goods and other related goods (common resources and artificially scarce goods) which are unlikely to be provided at their optimal levels by markets. It also examines how government policies can address the problem.

Public Goods and Common Resources

a. Characteristics of private and other goods

b. Public goods c. Provision of public goods d. Common resources and the tragedy of

the commons e. Artificially scarce goods

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Characteristics of Private and Other Goods

Goods can be classified according to two attributes:

1. Whether they are excludable: its supplier can prevent people who do not pay for it from consuming it.

2. Whether they are rival in consumption: if the same unit of the good cannot be consumed by more than one person at the same time.

By this classification there are four types of goods, each with different characteristics: private goods, public goods, common resources and artificially scarce goo3ds.

Characteristics of private and other goods

Markets and efficiency

Private goods are those that are both excludable and rival in consumption? they are efficiently produced and consumed in a competitive market.

When goods are nonexcludable, there is a free-rider problem

because of which consumers will not want to pay producers ? inefficiently low production.

When goods are nonrival in consumption, the efficient price for

consumption is zero since the marginal cost of providing good is zero and the marginal benefit is positive. But if producers charge a positive price is charged to cover the cost of production ? inefficiently low consumption.

So private goods are the only goods which can be efficiently produced and consumed in competitive markets. Although most goods are private goods, many goods are of the other three types.

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Public Goods

A public good is a good that is both nonexcludable and nonrival in consumption. Examples:

Disease prevention: when infectious and contagious diseases are prevented everyone is protected from disease.

National defense: when a nation is defended, everyone in the nation is defended.

Scientific research: more knowledge benefits everyone.

Television broadcasting: everyone can watch free.

Private firms will not produce it at all, under-produce it, or not produce it the way consumers want it. Sometimes non-profit organizations with public contributions can provide it. Small communities can provide it with donations and volunteers. TV can work with advertisments.

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Providing Public Goods

Some public goods require either-or decisions. For others, the amount needs to be chosen. How much of a public good should be provided? The marginal social benefit of an additional unit of a public good is equal to the sum of each consumer's individual marginal benefit from that unit. At the efficient quantity, the marginal social benefit equals the marginal cost.

No individual has an incentive to pay for providing the efficient quantity of a public good because each individual's marginal benefit is less than the marginal social benefit.

Problem is acute when there are many people.

This is a primary

justification for the

existence of

government.

Government pays from

tax revenue.

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Providing Public Goods

Cost-benefit analysis: estimating the social costs and social benefits of providing a public good. Estimating costs are relatively easy, but benefits are more difficult: how much is it worth to everyone? Individuals tend to overstate the good's value to them, because they don't have to pay for it themselves.

Voting does not necessarily provide an answer. Voting is not done on a single issue. Moreover, even if it is, people may not want to vote at all, because they will have to make an effort to vote, while their expected benefit is small ? since they believe that their vote will not make a difference. Yet people do vote. This is called the voting paradox.

In general, if there are many people who want something, they

will have collective action problem because of the free rider

problem. Smaller groups with strong interests find it easier to

unite.

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Common Resources

Common resources: nonexcludable and rival in consumption

The problem of overuse ? tragedy of the commons: a user depletes the amount of the common resource available to others but does not take this cost into account when deciding how much to use the common resource

Each fisherman's

individual marginal cost

does not include the

cost that his or her

actions impose on

others: the depletion of

the common resource

? the marginal social

cost curve, MSC, lies

above the supply curve;

in an unregulated

market, the quantity of

the common resource

used, QMKT, exceeds the

efficient quantity of use,

QOPT. Just like an

externality.

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