Lecture Notes: Econ 203 Introductory Microeconomics Lecture/Chapter 11: Public Goods/Common Resources M. Cary Leahey Manhattan College Fall 2012

2 Goals Look at the characteristics and different kinds of goods-private goods, public goods and common resources. We introduce new concepts of rival (your consumption reduces others consumption of the same good) and excludable (someone can be prevented from using the good) to describe goods. We discover why the market does not produce ‘enough” of these kinds of public goods and overuses these common resources. We examine various public policies undertaken to deal with the existence of different kinds of goods

3 Introduction Many goods have no price, such as national defense or clean water. With no prices the allocation of these goods can be inefficient and market forces are absent. The private market may fail to provide the ‘socially optimal” quantities of those goods.

4 Characteristics of goods Excludable goods are those goods whose use can be prevented by another person Excludable: wireless internet signal Nonexcludable: radio signal A good is rival in consumption if one’s use diminishes the use by others. Rival: most food goods Non-rival: MP3 downloads

5 Kinds of goods Private goods – excludable and rival in consumption Example: food Public goods – not excludable not rival Example: national defense Common resources: rival but not excludable Example: fish in the ocean Club goods: excludable but not rival Example: cable TV (outputs of natural monopolies) The demarcation between categories is not clean. Example: a road Uncontested non-toll road, road is a public good Uncontested tool road: club good Congested tool road: private good

6 Public goods Public goods are underprovided by the private market because of the free rider problem. Free rider – someone who enjoys the benefit of the good but avoids paying. If a good is not excludable, people have incentives to free ride because they cannot be prevented from not paying. Result is the good is not produced or under produced even if buyers collectively value the good higher than its production cost. The role should provide the good, paid for by a tax on those who benefit. Problem: the benefit is hard to measure (value of public safety). On approach is cost-benefit analysis-that compare the costs and benefits of providing the public good. While imprecise, this is a good first step. Important public goods: National defense Basic research/knowledge Reducing poverty.

7 Common resources Like public goods, common resources are not excludable. Cannot prevent free riding Little incentive for private market provision Role for govt. to provide more the good Common resources are also rival in consumption One person's use reduces others ability to use Role of govt. to prevent overuse (the tragedy of sheep overgrazing in the town commons) Some examples: Clean air/water Congested roads Fish and wildlife (exhaustible resources)

8 Government approaches to the problem Three govt approaches: Corrective taxes/permits (internalize the externality) Regulate (common and control) use Divide and sell lots (transform into a private good)

9 Summary Characteristics of goods Excludable-someone can be prevented from using the good Rival-if the consumption of one can reduce the ability of another to consume Private goods are rival and excludable and are the kinds of goods markets work best with Public goods are neither excludable nor rival in consumption This promotes the problem of free riders, consumer do not have to pay, so firms will be less willing to provide those goods. Govts tend to provide public goods, guided by cost benefit analysis to figure ought how much to provide. Common resources are rival in consumption but not excludable, such as grazing land, air/water, and congested roads. The line between private/public goods/common resources is not always clean. People tend to overuse common resources so govts try to limit their use by taxes or regulation.