1 Public Goods and Common-Pool Resources

2 Characteristics of a Good Excludable: the property of a good whereby a person can be prevented from using it Rival: the property of a good whereby one person’s use diminishes other peoples’ use

3 Classification of Goods RIVAL YesNo EXCLUDABLE YesPrivate GoodsClub Goods NoCommon-Pool Resources Public Goods

4 Non-rival and non-excludable The Free Rider Problem: Individuals have little (or no) incentive to pay for public goods because they can enjoy the benefits by free riding on the payments of others Public goods result in market failure The level of provision will be inefficiently low Intuition follows from recognizing that provision generates a positive externality

5 Example: A Small Fireworks Display Assumptions Two individuals Identical demands for bottle rockets, Q = 4 – P P = 2 is the price per bottle rocket What is the equilibrium quantity of bottle rockets? What is the efficient quantity of bottle rockets?

6 The Efficient Quantity of a Public Good Because public goods are non-rival and non-excludable… Solving for the efficient quantity requires a vertical summation of the individual demand curves Then can set the SMB = MC Note: this is different from the horizontal summation with a private good

7 A Role for Government Intervention Governments can provide public goods to correct the market failure (free rider problem) Use tax revenues to provide a variety of public goods –Examples? The level of government provision is greater than the level of free-market provision

8 Common-Pool Resources Rival and non-excludable “The Tragedy of the Commons”: Individuals have less incentive to take care of (or conserve) things that are commonly owned than things that they own themselves C-P resources are susceptible to market failure Inefficiently high levels of exploitation Intuition follows form recognizing that use generates a negative externality

9 Example: An Open-Access Fishery 1.There is no way to stop people from fishing (non-excludability) 2.When one person catches a fish, it makes it hard for others to catch fish (rivalry) 3.People think “if I don’t catch the fish, someone else will” 4.The result is over-fishing

10 Possible Ways to Solve the “Tragedy” Social Norms –“The Lobster Gangs of Maine” –Balinese rice temples Establish property rights –Private ownership –Tradable fishing rights (individual transferable quotas, ITQs)