Principles of Microeconomics PowerPoint Presentations for Principles of Microeconomics Sixth Canadian Edition by Mankiw/Kneebone/McKenzie Adapted for the Sixth Canadian Edition by Marc Prud’homme University of Ottawa

Public goods and common resources Chapter 11 Copyright © 2014 by Nelson Education Ltd.

Public goods and common resources In this chapter we examine the problems that arise for goods without market prices. Our analysis will shed light on one of the ten principles of economics in Chapter 1: Governments can sometimes improve market outcomes. Copyright © 2014 by Nelson Education Ltd.

The different Kinds of Goods In 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 in consumption? How well do markets work in providing the goods that people want? The answer to this question depends on the good being considered. The price of ice‐cream cones adjusts to balance supply and demand, and this equilibrium maximizes the sum of producer and consumer surplus. Yet, as we discussed in Chapter 10, we cannot rely on the market to prevent aluminum manufacturers from polluting the air we breathe: Buyers and sellers in a market typically do not take account of the external effects of their decisions. Thus, markets work well when the good is ice cream, but they work badly when the good is clean air. Copyright © 2014 by Nelson Education Ltd.

The different Kinds of Goods Excludability: the property of a good whereby a person can be prevented from using it Rival in consumption: the property of a good whereby one person’s use diminishes other people’s use From these two characteristics, goods can be divided into four categories (next slide): Copyright © 2014 by Nelson Education Ltd.

The different Kinds of Goods Private goods are both excludable and rival in consumption. Public goods are neither excludable nor rival in consumption. Common resources are rival in consumption but are not excludable. Club goods are excludable but are not rival in consumption. Copyright © 2014 by Nelson Education Ltd.

FIGURE 11.1: Four Types of Goods Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Define public goods and common resources, and give an example of each. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Active Learning Categorizing Roads A road is which of the four kinds of goods? Hint: The answer depends on whether the road is congested or not, and whether it’s a toll road or not. Consider the different cases. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Active Learning Answers Rival in consumption? Only if congested Excludable? Only if a toll road Four possibilities: Uncongested non-toll road: public good Uncongested toll road: natural monopoly Congested non-toll road: common resource Congested toll road: private good Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Public goods To understand how public goods differ from other goods and why they present problems for society, let’s consider an example: A fireworks display Not excludable Not rival in consumption Thinkstock Copyright © 2014 by Nelson Education Ltd.

The Free-Rider Problem When the benefits of a product exceed its costs, it is efficient to produce it. Can we always rely on the private market to produce it? It depends! Is it excludable? Even if producing the good is socially desirable since it confers an external benefit, because it is not excludable, the private market cannot make a profit, and it does not get produced. Because the product in question is are not excludable, people have an incentive to be free riders. Copyright © 2014 by Nelson Education Ltd.

The Free-Rider Problem Free rider: a person who receives the benefit of a good but avoids paying for it Because of the “free rider” problem, the market fails to produce an efficient outcome. The market fails because of an externality. The solution is simple, however! Although the private market fails to supply the product the solution to the problem is obvious: The government can provide the product. Copyright © 2014 by Nelson Education Ltd.

Some Important Public Goods National defence Basic research General knowledge is a public good. Specific technological knowledge is not. Fighting poverty Copyright © 2014 by Nelson Education Ltd.

The Difficult Job of Cost–Benefit Analysis Knowing that the government has a role to play in the provision of public goods is a first step. The government must now decide what public goods to provide and in what quantities. Cost–benefit analysis will help answer these questions. Copyright © 2014 by Nelson Education Ltd.

The Difficult Job of Cost–Benefit Analysis Cost–benefit analysis: a study that compares the costs and benefits to society of providing a public good Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. What is the free-rider problem? Why does the free-rider problem induce the government to provide public goods? How should the government decide whether to provide a public good? Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Common resources Common resources, like public goods, are not excludable. Common resources are, however, rival in consumption. Copyright © 2014 by Nelson Education Ltd.

The Tragedy of the Commons The Tragedy of the Commons: a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole Copyright © 2014 by Nelson Education Ltd.

The Tragedy of the Commons When one person uses a common resource, that person diminishes other people’s enjoyment of it. Because of this negative externality, common resources tend to be used excessively. The government can solve the problem by: reducing use of the common resource through regulation or taxes turning the common resource into a private good Copyright © 2014 by Nelson Education Ltd.

Some Important Common Resources Clean air and water Congested roads Fish, whales, and other wildlife Video: Overfishing, the crash of the Northern Cod Population example (from "The end of the line") http://www.youtube.com/watch?v=xWfqZggtM_w Thinkstock Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Why do governments try to limit the use of common resources? Copyright © 2014 by Nelson Education Ltd.

Classroom Activity Private Goods/Public Goods: A Demonstration I need a volunteer please. Are you enjoying the candy and the art? Are the rest of you getting any enjoyment from the candy? Are you getting any enjoyment from the art? Activity 1 – Private Goods/Public Goods: A Demonstration Type: In-class demonstration Topics: Public and private goods Materials needed: A candy bar Time: 10 minutes Class limitations: Works in any size class Purpose: This example vividly illustrates the difference between public and private goods. Instructions: Ask for a volunteer. Give the volunteer a candy bar and ask him or her to eat it. While the student eats the candy, explain that you don’t want the student’s enjoyment of the candy to be marred by taking notes. Offer to draw some beautiful artwork on the board to increase the volunteer’s enjoyment. Draw a picture on the board. It need not be complex and probably won’t be beautiful. A canoe with a couple of stick figures on a river works well, particularly if the canoe is headed for a waterfall. A large poster, or a slide, of real artwork could be substituted. Ask the volunteer if he, or she, is enjoying the candy and the art. Ask the rest of the class if they get any enjoyment from the candy. Ask the rest of the class if they get any enjoyment from the art. Points for Discussion: The candy is a private good. It is rival in consumption and excludable. Only the volunteer got to enjoy the candy. The candy could easily be rationed by price. The “artwork” is neither rival in consumption nor excludable. The volunteer’s enjoyment did not diminish the enjoyment of the rest of the class. Price rationing would not be effective for the “artwork” since all students in the classroom could see the art, even if they didn’t pay. The “artwork” is a public good. This makes a good introduction to many public goods issues.   Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. The end Chapter 11 Copyright © 2014 by Nelson Education Ltd.