Public Goods and Common Property Resources

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Characteristics of Goods When thinking about the various goods in the economy, it is useful to group them according to two characteristics: u Is the good excludable? u Is the good rival?

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Characteristics of Goods u Excludability u People can be prevented from enjoying the good. u Laws recognize and enforce private property rights.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Characteristics of Goods u Rivalness u 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 u Private Goods u Public Goods u Common Resources u Natural Monopolies

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Types of Goods u Private Goods u Are both excludable and rival. u Public Goods u Are neither excludable nor rival.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Types of Goods u Common Resources u Are rival but not excludable. u Natural Monopolies u Are excludable but not rival.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Types of Goods (Fig. 1)

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 u 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. u 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 u The government can decide to provide the public good if the total benefits exceed the costs. u 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. Examples of Public Goods u National Defense u Basic Research u Programs to Fight Poverty u Public Radio u Fireworks Displays

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Cost-Benefit Analysis u In order to decide whether to provide a public good or not, the total benefits of all those who use the good should be compared to the costs of providing and maintaining the public good. u 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. 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 (see G. Hardin, 1968). u Common resources tend to be used excessively when individuals are not charged for their usage.

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. Examples of Common Resources u Clean air and water u Oil pools, aquifer u Congested roads u Fish, whales, wildlife, etc. u Public parks

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Fisheries n Common Resource (generally) n Renewable Resource but destructible n Open Access leads to overexploitation, possible extinction n One-quarter of world’s fisheries on brink of collapse (Stavins, 2003)

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Why Overexploitation of Fisheries? n Fishermen receives full benefits of aggressive fishing (larger catch) but do not pay all costs n If left unmanaged, fisheries generally operate at a point greater than biological sustainability and economic efficiency (social)

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How to Regulate Fisheries n Open Access Regulations n Market-Based Regulation

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Open Access Regulations n How fish may be caught (gear, nets, technology) n Which fish may be caught (size, species) n When fish may be caught (season) n Where fish may be caught (areas) n How many fish may be caught (quotas)

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Why Inefficient? n Overcapitalization (too much capacity in the fishing industry) n Extremely short seasons n Excessive risk taking (incentive to fish in unsafe conditions) n Regulatory approach has not solved problem of overfishing

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market-Based Approach n Individual Fishing Quotas (IFQs) n Transferable n More efficient than command/control regulations

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market-Based Approach n Some countries have adopted IFQs readily (Iceland, New Zealand) n Others (U.S., Canada, Netherlands) are beginning to adopt IFQs n U.S. example: Alaskan Halibut Industry (since 1995)