19 Public Goods and Common Resources Lecture

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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