Public Goods and Common Resources

Public Goods and Common Resources We examine the problems that arise for free goods/ goods with out market prices. Since there is no price attached to the good, market failure can result in the production and consumption of the commodity.

Public Goods and Common Resources: Outline Different types of goods and examples Characteristics of public goods and problems CBA Common resources and tragedy of the commons Property rights and market failure

The Different Kinds of Goods Two characteristics of goods Excludability: the property of a good whereby a person can be prevented from using it Rivalry: the property of a good whereby one person’s use diminishes other people’s use Four groups of goods Private goods: both excludable and rival Public goods: neither excludable nor rival Common resources: rival but not excludable Natural monopoly: Excludable but not rival

Public Goods and Common Resources Externalities arise in case of public goods and common resources since both are not excludable Due to the presence of externalities, government intervention can raise economic well-being Free- rider problem is associated with public goods since they are neither rival nor excludable

Public Goods and Free-Rider Problem Free-rider is a person who receives the benefit of the good and avoids paying for it Free-rider problem prevents the market from supplying public goods Important public goods include- defence, police protection, basic research, poverty alleviation Cost-benefit analysis compares the costs and benefits to society of providing a public good

Common Resources Problems associated with cost-benefit analysis ?? Tragedy of the commons is a parable that illustrates why common resources get used more than is socially desirable Important common resources include- environment, oil pools, congested roads, wildlife

Conclusion In the absence of property rights, market fails to allocate resources efficiently Government, through the right policy mix, can potentially solve the problem and increase economic well-being

Mid-Term Exam #2 Review Feb 27, 2004 Email: ramanik@uvic.ca Your questions/ concerns/ doubts for mid-term #2. Suggestions/ Major concerns regarding teaching, course content, labs. If you have any issues regarding the syllabus covered so far, please see me/ email me immediately.

Problem on Externalities There are three industrial firms in Happy Valley Firm Initial pollution level Cost of reducing pollution by one unit A 70 units $20 B 80 25 C 50 10

Problem on Externalities The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits. Who sells permits, and how many do they sell? Who buys permits, and how many do they buy? What is the total cost of pollution reduction in this situation? Briefly explain why the sellers and buyers are each willing to do so? How much higher would the costs of pollution reduction be if the permits could not be traded?