Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. “The best things in life are free...” n When a good does not have a price, private markets cannot ensure that it is produced and consumed in the proper amounts. n Government 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 u Excludability u People can be prevented from enjoying the good. u Laws recognize and enforce private property rights. uRivalness 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. 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

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Public Goods: The Free-Rider Problem u Since you can’t be excluded from enjoying a public good, people may withhold paying for it, hoping that others will pay for it. u This 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 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. Some Important Public Goods u National Defense u Basic Research u Programs to Fight Poverty

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 wants to use them. But … Common resources are rival goods because one person’s use of them 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: One person use of a common resource diminishes another person’s enjoyment of it. u Common resources are used excessively when individuals are not charged for their usage. u This creates a negative externality.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Examples of Common Resources u Clean air and water u Oil pools u Congested roads u Fish, whales, and other wildlife

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. Summary u Goods differ in whether they are excludable and whether they are rival. u A good is excludable if it is possible to prevent someone from using it. u 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 u Public goods are neither rival nor excludable. u Because people are not charged for their use of public goods, they have an incentive to free ride when the good is provided privately. u Governments provide public goods, making quantity decisions based upon cost-benefit analysis.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u Common resources are rival but not excludable. u Because people are not charged for their use of common resources, they tend to use them excessively. u Governments tend to try to limit the use of common resources.