Chapter Public Goods and Common Resources 11. The Different Kinds of Goods Excludability –...
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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.](https://reader035.fdocuments.in/reader035/viewer/2022070307/551a39b2550346a4248b5807/html5/thumbnails/1.jpg)
Chapter
Public Goods and CommonResources
11
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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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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.
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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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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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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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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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• 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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• 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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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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• 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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• 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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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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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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Common Resources
• Some important common resources– Clean air and water– Congested roads– Fish, whales, and other wildlife
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• 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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• 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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• 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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