16 Public Goods and Common Resources Notes and teaching tips: 13. CHAPTER Public Goods and Common Resources Notes and teaching tips: 13. To view a full-screen figure during a class, click the red “expand” button. To return to the previous slide, click the red “shrink” button. To advance to the next slide, click anywhere on the full screen figure.

Classifying Goods and Resources Excludable A good is excludable if only the people who pay for it are able to enjoy its benefits. Brinks’s security services, East Point Seafood’s fish, and a Coldplay concert are examples. Nonexcludable A good is nonexcludable if everyone benefits from it regardless of whether they pay for it. The services of the LAPD, fish in the Pacific Ocean, and a concert on network television are examples.

Classifying Goods and Resources Rival A good is rival if one person’s use of it decreases the quantity available for someone else. A Brinks’s truck can’t deliver cash to two banks at the same time. A fish can be consumed only once. Nonrival A good is nonrival if one person’s use of it does not decrease the quantity available for someone else. The services of the LAPD and a concert on network television are nonrival.

Classifying Goods and Resources A Four-Fold Classification Private Goods A private good is both rival and excludable. A can of Coke and a fish on East Point Seafood’s farm are examples of private goods. Public goods A public good is both nonrival and nonexcludable. A public good can be consumed simultaneously by everyone, and no one can be excluded from enjoying its benefits. National defense is the best example of a public good.

Classifying Goods and Resources Common Resources A common resource is rival and nonexcludable. A unit of a common resource can be used only once, but no one can be prevented from using what is available. Ocean fish are a common resource. They are rival because a fish taken by one person isn’t available for anyone else. They are nonexcludable because it is difficult to prevent people from catching them.

Classifying Goods and Resources Natural Monopolies In a natural monopoly, economies of scale exist over the entire range of output for which there is a demand. A special case of natural monopoly arises when the good or service can be produced at zero marginal cost. Such a good is nonrival. If it is also excludable, it is produced by a natural monopoly. The Internet and cable television are examples.

Classifying Goods and Resources Figure 16.1 shows this four-fold classification of goods and services.

Classifying Goods and Resources Two Problems Public goods create a free-rider problem—the absence of an incentive for people to pay for what they consume. Common resources create a problem called the tragedy of the commons—the absence of incentives to prevent the overuse and depletion of a resource.

Public Goods and the Free-Rider Problem The value of a private good is the maximum amount that a person is willing to pay for one more unit of it. The value of a public good is the maximum amount that all the people are willing to pay for one more unit of it. To calculate the value placed on a public good, we use the concepts of total benefit and marginal benefit. Free-rider experiment. There are lots of free-rider experiments that you can get your students to do. An easy one from which the students learn quickly is the following. Each students has ten $10 tokens to invest Students instructed to choose the allocation between 1. A private account that provides a return to the student of 10 percent 2. A public account that provides a return to the class of 50 percent that is shared equally with everyone in the class Play the game for three rounds, permit no communication between rounds, and post the results after each round Permit discussion and communication and then repeat the game for another three rounds

Public Goods and the Free-Rider Problem The Benefit of a Public Good Total benefit is the dollar value that a person places on a given quantity of a good. The greater the quantity of a good, the larger is a person’s total benefit. Marginal benefit is the increase in total benefit that results from a one-unit increase in the quantity of a good. The marginal benefit of a public good diminishes with the level of the good provided.

Public Goods and the Free-Rider Problem Private Provision If a private firm tried to produce and sell a public good, almost no one would buy it. The free-rider problem results in too little of the good being produced.

Public Goods and the Free-Rider Problem Public Provision Because the government can tax all the consumers of the public good and force everyone to pay for its provision, public provision overcomes the free-rider problem. If two political parties compete, each is driven to propose the efficient quantity of a public good. A party that proposes either too much or too little can be beaten by one that proposes the efficient amount because more people vote for an increase in net benefit.

Public Goods and the Free-Rider Problem Principle of Minimum Differentiation The attempt by politicians to appeal to a majority of voters leads them to the same policies—an example of the principle of minimum differentiation. The principle of minimum differentiation is the tendency for competitors to make themselves similar so as to appeal to the maximum number of clients (voters). (The same principle applies to competing firms such as McDonald’s and Burger King).

Public Goods and the Free-Rider Problem Two Types of Political Equilibrium The two types of political equilibrium—efficient provision and inefficient overprovision of public goods correspond to two theories of government: Social interest theory predicts that political equilibrium achieves efficiency because well-informed voters refuse to support inefficient policies. Public choice theory predicts that government delivers an inefficient allocation of resources—that government failure parallels market failure.

Public Goods and the Free-Rider Problem Why Government Is Large and Grows Two possible reasons are Voter preferences Inefficient overprovision Government grows because the voters’ demand for some public goods is income elastic. Inefficient overprovision might explain the size of government but not its growth rate.

Public Goods and the Free-Rider Problem Voters Strike Back If government grows too large relative to the value voters place on public goods, there might be a voter backlash that leads politicians to propose smaller government. Privatization is one way of coping with overgrown government and is based on distinguishing between public provision and public production of public goods.

Common Resources The Tragedy of the Commons The tragedy of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource. Examples include the Atlantic Ocean cod stocks, South Pacific whales, and the quality of the earth’s atmosphere. The traditional example from which the term derives is the common grazing land surrounding middle-age villages.

Common Resources The Efficient Use of the Commons The quantity of fish caught by each boat decreases as the number of boats increases. But no one has an incentive to take this fact into account when deciding whether to fish. The efficient use of a common resource requires marginal social cost to equal marginal social benefit.

Common Resources Marginal Social Benefit Marginal social benefit is the increase in total fish catch that results from an additional boat, not the average catch per boat. The table on the next slide shows the calculation of marginal social benefit.

Common Resources Public Choice and Political Equilibrium It is easy for economists to agree that ITQs make it possible to achieve an efficient use of a common resource. It is difficult to get the political marketplace to deliver that outcome. In 1996, Congress killed an attempt to use ITQs in the Gulf of Mexico and the Northern Pacific Ocean. Self-interest and capture of the political process sometimes beats the social interest.

THE END