Public Goods and
Common Resources
Chapter 11
Copyright ? 2001 by Harcourt,Inc.
All rights reserved,Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department,Harcourt College Publishers,
6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
“The best things in life are free.,,”
Free goods provide a special challenge for
economic analysis
Most goods in our economy are allocated
in markets…
…for these goods,prices are the
signals that guide the decisions of
buyers and sellers.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
“The best things in life are free.,,”
When goods are available free of
charge,the market forces that
normally allocate resources in our
economy are absent.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
“The best things in life are free.,,”
When a good does not have a price
attached to it,private markets
cannot ensure that the good is
produced and consumed in the
proper amounts.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
“The best things in life are free.,,”
In such cases,government policy can
potentially remedy the market
failure that results,and raise
economic well-being.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Different Kinds of Goods
When thinking about the various
goods in the economy,it is useful to
group them according to two
characteristics:
? Is the good excludable?
? Is the good rival?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Different Kinds of Goods
?Excludability
? People can be prevented from enjoying
the good.
? Laws recognize and enforce private
property rights.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Different Kinds of Goods
?Rivalness
?One person’s use of the good
diminishes another person’s
enjoyment of it.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Four Types of Goods
?Private Goods
?Public Goods
?Common Resources
?Natural Monopolies
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Types of Goods
?Private Goods
?Are both excludable and rival.
?Public Goods
?Are neither excludable nor rival.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Types of Goods
?Common Resources
?Are rival but not excludable.
?Natural Monopolies
?Are excludable but not rival.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Types of Goods
Rival?
Yes No
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
? National defense
? Knowledge
? Uncongested nontoll
roads
Excludable?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Free-Rider Problem
A free-rider is a person who
receives the benefit of a good
but avoids paying for it.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Free-Rider Problem
?Since people cannot be excluded from
enjoying the benefits of a public good,
individuals may withhold paying for
the good hoping that others will pay
for it.
?The free-rider problem prevents
private markets from supplying public
goods.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Solving the Free-Rider
Problem
?The government can decide to provide
the public good if the total benefits
exceed the costs.
?The government can make everyone
better off by providing the public good
and paying for it with tax revenue.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Some Important Public Goods
?National Defense
?Basic Research
?Programs to Fight Poverty
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Are Lighthouses
Public Goods?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Cost-Benefit Analysis
?In order to decide whether to provide a
public good or not,the total benefits of all
those who use the good must be compared
to the costs of providing and maintaining
the public good.
?Cost benefit analysis estimates the total
costs and benefits of a good to society as a
whole.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Cost-Benefit Analysis
?A cost-benefit analysis would be used to
estimate the total costs and benefits of the
project to society as a whole.
?It is difficult to do because of the absence of
prices needed to estimate social benefits and
resource costs.
?The value of life,the consumer’s time,and
aesthetics are difficult to assess.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Common Resources
Common resources,like public
goods,are not excludable,They are
available free of charge to anyone
who wishes to use them.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Common Resources
Common resources are rival
goods because one person’s use
of the common resource reduces
other people’s use.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Tragedy of the Commons
The Tragedy of the Commons is a story
with a general lesson,When one person
uses a common resource,he or she
diminishes another person’s enjoyment
of it.
?Common resources tend to be used
excessively when individuals are not
charged for their usage,
?This creates a negative externality.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Examples of Common
Resources
?Clean air and water
?Oil pools
?Congested roads
?Fish,whales,and other
wildlife
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Why Isn’t the Cow Extinct?
Private
Ownership and
the Profit
Motive!
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Importance of
Property Rights
The market fails to allocate resources
efficiently when property rights are
not well-established (i.e,some item of
value does not have an owner with the
legal authority to control it).
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Importance of
Property Rights
When the absence of property
rights causes a market failure,the
government can potentially solve
the problem.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Goods differ in whether they are
excludable and whether they are rival.
?A good is excludable if it is possible to
prevent someone from using it.
?A good is rival if one person’s enjoyment
of the good prevents other people from
enjoying the same unit of the good.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Public goods are neither rival nor
excludable.
?Because people are not charged for
their use of public goods,they have an
incentive to free ride when the good is
provided privately.
?Governments provide public goods,
making quantity decisions based upon
cost-benefit analysis.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Common resources are rival but not
excludable.
?Because people are not charged for
their use of common resources,they
tend to use them excessively.
?Governments tend to try to limit the
use of common resources.
Common Resources
Chapter 11
Copyright ? 2001 by Harcourt,Inc.
All rights reserved,Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department,Harcourt College Publishers,
6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
“The best things in life are free.,,”
Free goods provide a special challenge for
economic analysis
Most goods in our economy are allocated
in markets…
…for these goods,prices are the
signals that guide the decisions of
buyers and sellers.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
“The best things in life are free.,,”
When goods are available free of
charge,the market forces that
normally allocate resources in our
economy are absent.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
“The best things in life are free.,,”
When a good does not have a price
attached to it,private markets
cannot ensure that the good is
produced and consumed in the
proper amounts.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
“The best things in life are free.,,”
In such cases,government policy can
potentially remedy the market
failure that results,and raise
economic well-being.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Different Kinds of Goods
When thinking about the various
goods in the economy,it is useful to
group them according to two
characteristics:
? Is the good excludable?
? Is the good rival?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Different Kinds of Goods
?Excludability
? People can be prevented from enjoying
the good.
? Laws recognize and enforce private
property rights.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Different Kinds of Goods
?Rivalness
?One person’s use of the good
diminishes another person’s
enjoyment of it.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Four Types of Goods
?Private Goods
?Public Goods
?Common Resources
?Natural Monopolies
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Types of Goods
?Private Goods
?Are both excludable and rival.
?Public Goods
?Are neither excludable nor rival.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Types of Goods
?Common Resources
?Are rival but not excludable.
?Natural Monopolies
?Are excludable but not rival.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Types of Goods
Rival?
Yes No
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
? National defense
? Knowledge
? Uncongested nontoll
roads
Excludable?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Free-Rider Problem
A free-rider is a person who
receives the benefit of a good
but avoids paying for it.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Free-Rider Problem
?Since people cannot be excluded from
enjoying the benefits of a public good,
individuals may withhold paying for
the good hoping that others will pay
for it.
?The free-rider problem prevents
private markets from supplying public
goods.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Solving the Free-Rider
Problem
?The government can decide to provide
the public good if the total benefits
exceed the costs.
?The government can make everyone
better off by providing the public good
and paying for it with tax revenue.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Some Important Public Goods
?National Defense
?Basic Research
?Programs to Fight Poverty
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Are Lighthouses
Public Goods?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Cost-Benefit Analysis
?In order to decide whether to provide a
public good or not,the total benefits of all
those who use the good must be compared
to the costs of providing and maintaining
the public good.
?Cost benefit analysis estimates the total
costs and benefits of a good to society as a
whole.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Cost-Benefit Analysis
?A cost-benefit analysis would be used to
estimate the total costs and benefits of the
project to society as a whole.
?It is difficult to do because of the absence of
prices needed to estimate social benefits and
resource costs.
?The value of life,the consumer’s time,and
aesthetics are difficult to assess.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Common Resources
Common resources,like public
goods,are not excludable,They are
available free of charge to anyone
who wishes to use them.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Common Resources
Common resources are rival
goods because one person’s use
of the common resource reduces
other people’s use.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Tragedy of the Commons
The Tragedy of the Commons is a story
with a general lesson,When one person
uses a common resource,he or she
diminishes another person’s enjoyment
of it.
?Common resources tend to be used
excessively when individuals are not
charged for their usage,
?This creates a negative externality.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Examples of Common
Resources
?Clean air and water
?Oil pools
?Congested roads
?Fish,whales,and other
wildlife
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Why Isn’t the Cow Extinct?
Private
Ownership and
the Profit
Motive!
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Importance of
Property Rights
The market fails to allocate resources
efficiently when property rights are
not well-established (i.e,some item of
value does not have an owner with the
legal authority to control it).
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Importance of
Property Rights
When the absence of property
rights causes a market failure,the
government can potentially solve
the problem.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Goods differ in whether they are
excludable and whether they are rival.
?A good is excludable if it is possible to
prevent someone from using it.
?A good is rival if one person’s enjoyment
of the good prevents other people from
enjoying the same unit of the good.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Public goods are neither rival nor
excludable.
?Because people are not charged for
their use of public goods,they have an
incentive to free ride when the good is
provided privately.
?Governments provide public goods,
making quantity decisions based upon
cost-benefit analysis.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Common resources are rival but not
excludable.
?Because people are not charged for
their use of common resources,they
tend to use them excessively.
?Governments tend to try to limit the
use of common resources.
