Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability –...

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Chapter Public Goods and Common Resources 11

Transcript of Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability –...

Page 1: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

Chapter

Public Goods and CommonResources

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Page 2: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

The Different Kinds of Goods

• Excludability– Property of a good– A person can be prevented from using it

• Rivalry in consumption– Property of a good– One person’s use diminishes other people’s

use

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Page 3: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

Figure

Four types of goods

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Rival in consumption?

Yes No

Excludable?

Yes

Private goods

- Ice-cream cones - Clothing - Congested toll roads

Natural monopolies

- Fire protection - Cable TV - Uncongested toll roads

No

Common resources

- Fish in the ocean - The environment - Congested nontoll roads

Public goods

- Tornado system - National defense - Uncongested nontoll roads

Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one person’s use of the good diminishes other people’s use of it. This diagram gives examples of goods in each category.

Page 4: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

The Different Kinds of Goods

• Types of goods– Private goods

• Excludable & Rival in consumption

– Public goods• Not excludable & Not rival in consumption

– Common resources• Rival in consumption & Not excludable

– Natural monopoly• Excludable & Not rival in consumption

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Page 5: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

The Different Kinds of Goods

• Public goods & Common resources– Not excludable– People cannot be prevented from using them– No price attached to it– Positive externalities – Negative externalities

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Page 6: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

Public Goods

• The free-rider problem– Free rider

– Person who receives the benefit of a good but avoids paying for it

– Public goods – not excludable• Free-rider problem prevents the private market

from supplying the goods• Government - can remedy the problem

– If total benefits of a public good > its costs– Provide the public good– Pay for it with tax revenue– Make everyone better off

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Page 7: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

Public Goods

• Some important public goods– National defense

• Very expensive public good

– Basic research• General knowledge

– Fighting poverty• Welfare system• Food stamps

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Page 8: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

• Lighthouses– Mark specific locations so that passing ships can

avoid treacherous waters• Benefit - to the ship captain

– Not excludable, not rival in consumption

• Incentive – free ride without paying

– Most - operated by the government

• In some cases– Lighthouses - closer to private goods

• Coast of England, 19th century– Lighthouses – privately owned and operated– The owner - charged the owner of the nearby port

Are lighthouses public goods?

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Page 9: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

• Decide whether something is a public good– Determine who the beneficiaries are– Determine whether the beneficiaries can be

excluded from using the good

• A free-rider problem– When the number of beneficiaries is large– Exclusion of any one of them is impossible

Are lighthouses public goods?

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Page 10: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

Public Goods

• The difficult job of cost–benefit analysis– Government

• Decide what public goods to provide• In what quantities

– Cost–benefit analysis• Compare the costs and benefits to society of

providing a public good• Doesn’t have any price signals to observe• Government findings on the costs and benefits

– Rough approximations at best

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Page 11: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

• Cost: $10,000 – new traffic light• Benefit: increased safety

– Risk of a fatal traffic accident• Drops from 1.6% to 1.1 %

• Obstacle– Measure costs and benefits in the same units

• Put a dollar value on a human life– Priceless = infinite dollar value

How much is a life worth?

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Page 12: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

• Put a dollar value on a human life– Implicit dollar value

• Courts - award damages in wrongful-death suits– Ignores other opportunity costs of losing one’s life

• Risks - people are voluntarily willing to take– Value of human life = $10 million

• Cost-benefit analysis• Traffic light

– Reduces risk of fatality by 0.5 percentage points

• Expected benefit = 0.005 × $10 million = $50,000• Cost ($10,000) < Benefit ($50,000)• Approve the traffic light

How much is a life worth?

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Page 13: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

Common Resources

• Common resources– Not excludable– Rival in consumption

• The tragedy of the commons– Parable - why common resources are used

more than desirable• From society’s standpoint

– Social and private incentives differ– Arises because of a negative externality

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Page 14: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

Common Resources

• The tragedy of the commons– Negative externality

• One person uses a common resource– Diminishes other people’s enjoyment of it

• Common resources tend to be used excessively

– Government - can solve the problem• Regulation or taxes

– Reduce consumption of the common resource

• Turn the common resource into a private good

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Page 15: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

Common Resources

• Some important common resources– Clean air and water– Congested roads– Fish, whales, and other wildlife

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Page 16: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

• Species of animals– Commercial value - threatened with extinction

• Buffalo – North America– Hunting - 19th century

• Elephants– African countries– Hunting – today

• The cow– Commercial value– Species - continue to thrive

Why the cow is not extinct

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Page 17: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

• Elephant - common resource– No owners– Poachers - numerous

• Strong incentive to kill them• Slight incentive to preserve them

• Cows - private good– Ranches - privately owned– Ranchers

• Great effort to maintain the cattle population on his ranch• Reaps the benefit

Why the cow is not extinct

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Page 18: Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability – Property of a good – A person can be prevented from using it.

• Government intervention – help elephant population– Kenya, Tanzania, and Uganda

• Illegal to kill elephants; Illegal to sell ivory• Hard to enforce• Elephant population – still diminishing

– Botswana, Malawi, Namibia, and Zimbabwe• Elephants – private good• Allow people to kill elephants

– Only those on their own property

• Landowners - incentive to preserve elephants • Elephant population – started to rise

Why the cow is not extinct

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