Lecture #13 The Politics of The Global Environment: Public Goods, the Collective Action Problem, Free Riding, & Discounting

Goods

Different Types of Goods

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?

THE DIFFERENT KINDS OF GOODS Excludability Excludability refers to the property of a good whereby a person can be prevented from using it. Rivalry Rivalry refers to the property of a good whereby one person’s use diminishes other people’s use.

Classifying Goods and Resources Examples of RIVAL items are: The services of Brinks Security Fish both in ocean and in a fish farm A seat at a live concert Examples of NON-RIVAL items are: The protection provided by a city police department A broadcast television signal

THE DIFFERENT KINDS OF GOODS Four Types of Goods Private Goods Public Goods Common Resources Natural Monopolies

Classifying Goods and Resources A Four-Fold Classification Private Good A good or service that can be consumed by only one person at a time and only by those people who have bought it or own it. Public Good A good or service that can be consumed simultaneously by everyone and from which no one can be excluded.

Classifying Goods and Resources Common Resource A resource that is non-excludable and rival—can be used only once but no one can be prevented from using what is available. Natural Monopoly A good or service that is non-rival but excludable—can be produced at zero marginal cost.

THE DIFFERENT KINDS OF GOODS Private Goods Are both excludable and rival. Public Goods Are neither excludable nor rival. Common Resources Are rival but not excludable. Natural Monopolies Are excludable but not rival.

Figure 1 Four Types of Goods Rival? Yes No Private Goods Natural Monopolies • Ice-cream cones Clothing Congested toll roads • Fire protection Cable TV Uncongested toll roads Yes Excludable? Common Resources Public Goods • Fish in the ocean The environment Congested nontoll roads • Tornado siren National defense Uncongested nontoll roads No Copyright © 2004 South-Western

Classifying Goods and Resources .

Public Goods

Public Goods: “The best things in life are free. . .” Definition: goods that are non-rivalries and non-excludable. Examples: Clean air, national defense, a reasonably cool climate Free goods provide a special challenge for economic analysis. Most goods in our economy are allocated in markets… When goods are available free of charge, the market forces that normally allocate resources in our economy are absent. 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. In such cases, government policy can potentially remedy the market failure that results, and raise economic well-being.

Some Important Public Goods National Defense Basic Research Fighting Poverty

YouTube Clip PHILOSOPHY - Rational Choice Theory: What are Public Goods? [HD] https://www.youtube.com/watch?v=oTIu12zqf04 Wireless Philosophy Published on Jul 31, 2015 Running time of 4:55 minutes In this video, Professor Jonathan Anomaly (Duke and UNC – Chapel Hill) discusses public goods, which are goods that are jointly consumed, so that they are available to everyone if they are available to anyone. Public goods often lead to unexploited gains from trade, and are frequently invoked to justify why we have a state to perform basic functions like defense, property adjudication, and the regulation of pollution.

Cost Benefit Analysis

The Difficult Job of Cost-Benefit Analysis Cost benefit analysis refers to a study that compares the costs and benefits to society of providing a public good. 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.

The Difficult Job of 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.

Collective Action Problem

The Collective Action Problem Public goods are often not produced in sufficient quantities (if at all) due to the collective action problem and free riding. Collective Action Problem: Because benefits are distributed across all actors once the good is created, individual actors are reluctant to invest time and resources to produce the good (particularly if they believe others will likely pay the costs to produce it).

PHILOSOPHY - Rational Choice Theory: Collective Action Problems [HD]  https://www.youtube.com/watch?v=p3KlgxYhDbk Wireless Philosophy Published on Jul 17, 2015 Running Time of 4:56 Minutes In this video, Professor Jonathan Anomaly (Duke and UNC – Chapel Hill) discusses collective action problems, which include any situation in which there is a conflict between individual rationality and social welfare, so that individuals working in isolation produce a worse outcome than they might if they could find a way to coordinate.

Free Riding

Public Goods and the Free Rider Problem A free rider is a person who consumes a good without paying for it. Public goods create a free-rider problem because the quantity of the good that a person is able to consume is not influenced by the amount that the person pays for the good, so no one has an incentive to pay and an unregulated market would produce an too little of the good.

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.

Free Riding Free/easy rider problem: as a result, countries have an incentive to “free ride” on the efforts of others or not contribute their fair share Climate change example: Biggest emitters of greenhouse gases (U.S., China, etc.) will be reluctant to pay the costs of reducing emissions to slow climate change if they believe others will do so or that pursuing their short-term self-interests would be more lucrative.

Other Examples of Free Rider Problems In the USA people pay voluntary subscriptions for the public broadcasting service – less than 10% do so. (In the UK it is mandatory to pay the TV licence fee.) The town of Cambridge distributed 350 bikes around the town for people to use free of charge. (You had to return the bike to a special stand after using it.) Within 4 days they had all gone.

The Free-Rider Problem 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.

Externalities and Public Goods - Free Rider Problem https://www.youtube.com/watch?v=J8MwChBF89E LearnEcon.com Published on Oct 21, 2014 Running Time of 1:42 minutes Externalities and Public Goods are two ways in which markets fail to reach an optimal outcome. As a result of watching this programme you should be able to: - Know the meaning of the following terms: private cost, social cost, externality, public goods, non-excludable goods, non-rival goods. - Understand why markets can fail to use resources optimally in the presence of externalities. - Be aware of the problems for markets created by public goods. - Understand the free rider problem. - Appreciate the limits to which governments can overcome the problems associated with externalities and public goods

Public Goods and Free Riders- Micro 6.1 https://www.youtube.com/watch?v=nsWuzS_dEM8 ACDCLeadership Published on Nov 11, 2014 Running Time of 2:42 Minutes "You didn't build that!" Mr. Clifford explains the characteristics of public goods and the free rider problem

Discounting

Discounting Definition: “discounting” refers here to the fact that people prefer instant gratification and delayed payment of costs. People tend to “discount” the future They focus on current benefits and are willing to take on large costs/risks as long as those costs/risks are seen as far off in the future. Examples: credit card debt, deficit spending

Discounting Relevant to many environmental issues Climate Change: action to address the problem would be costly and these costs would be borne now (e.g., Kyoto Treaty’s restrictions on emissions) but the benefits wouldn’t be felt until some time in the future (and the payoff would be a “non-event”— avoidance of severe consequences). These incentives run exactly counter to people’s natural inclinations: politicians will not want to impose immediate costs on their constituents (which will hurt them politically) for some uncertain, future payoff they won’t be in office (or perhaps even alive) to enjoy.

Common Goods

COMMON RESOURCES OR GOODS Common resources, like public goods, are not excludable. They are available free of charge to anyone who wishes to use them. Common resources are rival goods because one person’s use of the common resource reduces other people’s use. Definition: goods that are non-excludable but rivalrous (they can be used up) Examples: fish stocks in international waters, common grazing pasture

Some Important Common Resources/Goods Clean air and water Congested roads Fish, whales, and other wildlife

This is similar to a negative externality. Tragedy of the Commons The Tragedy of the Commons is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole. Common resources tend to be used excessively when individuals are not charged for their usage. This is similar to a negative externality.

“Tragedy of the Commons” Common goods are often depleted due to overuse (the “tragedy of the commons”): Individually rational choices lead to collectively suboptimal outcomes (just as in prisoner’s dilemma) Possible solution: enclosure (UNCLOS and exclusive economic zones)

PHILOSOPHY - Rational Choice Theory: Tragedy of the Commons [HD] https://www.youtube.com/watch?v=lj_gLquca7Q Wireless Philosophy Published on Jul 10, 2015 Running Time of 4:49 Minutes In this video, Professor Jonathan Anomaly (Duke and UNC – Chapel Hill) discusses commons tragedies, which are defined as a situation in which the benefits of an action are borne by the individual while the costs are shared by all members of a group.

The Tragedy of the Commons  https://www.youtube.com/watch?v=bs2P0wRod8U Marginal Revolution University Published on Jun 26, 2015 Running Time of 10:35 Minutes In this video, we take a look at common goods. Common resources are nonexcludable but rival. For instance, no one can be excluded from fishing for tuna, but they are rival — for every tuna caught, there is one less for everyone else. Nonexcludable but rival resources often lead to what we call a “tragedy of the commons.” In the case of tuna, this means the collapse of the fishing stock. Under a tragedy of the commons, a resource is often overused and under- maintained. Why does this happen? And how can we solve this problem? Like we’ve done so many times throughout this course, let’s take a look at the incentives at play. We also discuss Nobel Prize Winner Elinor Ostrom’s contributions to this topic.  

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.