Public Goods and Common Property Resources Chapter 11

Criteria Used To Classify Different Kinds of Goods Excludability Property of a good A person can be prevented from using it Rivalry in consumption Property of a good One person’s use diminishes other people’s use 2

Four types of goods 1 3 Rival in consumption? YesNo Excludable? Yes Private goods - Ice-cream cones - Clothing - Congested toll roads Natural monopolies - Fire protection - Cable TV - Uncongested toll roads No Common resources - Fish in the ocean - The environment - Congested nontoll roads Public goods - Tornado system - National defense - Uncongested nontoll roads Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one person’s use of the good diminishes other people’s use of it. This diagram gives examples of goods in each category.

Chpt. 11: Public Goods and Common Property Resources Public goods & Common resources Not excludable People cannot be prevented from using them No price attached to it Positive externalities (external benefits) Negative externalities (external costs) 4

Common Resources Some important common resources – Clean air and water – Congested roads – Fish, whales, and other wildlife 5

Tradable Permits A Property Rights Approach “Common” Property Problem –No one “owns” the air/water; therefore no one benefits from managing (pricing) its usage Solution is to assign the property right to one party and allow them to trade its use in the marketplace –Coase Theorem

Coase’s Theorem If property rights exist and transaction (bargaining) and information costs are low –Then parties will be able to bargain among themselves (without government intervention) to obtain an efficient outcome

An Example of the Coase Theorem Marketplace –Firm upstream from a farmer Firm produce a good valued by consumer but dumps pollutants into the river as a byproduct Cost of using the river to the firm is $0 –Cost of pollution abatement equipment $3M –Farmer Downstream from the firm Uses water to irrigate his agricultural products Pollution affects/degrades his product –Crop damage estimate to be $8M

Assigning the Property Rights If assigned to the firm –Farmer is willing to “bribe” the firm to reduce pollution Willing to pay firm to reduce gallons discharged up to marginal value of crop damage due to pollution Firm: willing to accept payments that are >= marg costs of treatment/reduction –Farmer WTP ~ $8m Buy equipment for ~$3m

Growth rate (replacement) and size of the fish stock/pool Too Small/Low Stock Size –Lower growth rate as fish can’t hook up and reproduce –Birth (replacement) less than death/harvest Growth rate declines; species becomes extinct Too Large Stock Size –Food sources (plankton, biomass, other fish) too small to support large # of fish Growth rate declines

Schaffer model: Relationship between the Fish Population and Growth

3 Possible Solutions 1.Open (unregulated) Fisheries (E c ) –Catch until total costs exceed revenues (up to zero profits) => ATC(Q) = TotRev(Q) = P*Q 2.Maximum Sustainable Yield(MSY) (E m ) –Largest “harvest” that can be sustained every year (harvest = replacement rate) –Biologist solution 3. Economically Efficient (E o ) –Maximize Economic Value (MC(Q) = MR(Q)

How do we use this to manage the fisheries (prevent extinction) Compare –Open Access Fishery (Tragedy of the Commons) Everyone who has a boat can harvest as many fish as they can catch profitably –Maximum Sustainable Yield (MSY) What is the largest stock of fish that can be sustained from one year to the next (harvest = growth rate at max stock size) –Economically Efficient Given costs/benefits – what is the efficient harvest

FIGURE 14.2 Efficient Sustainable Yield for a Fishery

Policy Options Command and Control (Regulation) –Set Quota for number of fish that can be caught Ignores differences in costs/efficiency of fishermen Can lead to over capacity (too many boats, too big) Discarded catch/by-catch issues Tradable permits (ITQs) –Determine optimal “harvest” and number of licenses to be issued –Divide quota/target by number of license = #fish caught per license –Auction or grandfather licenses –Allow owners to trade (one-year, or multi-year) –Multi-species/by-catch Taxes –Per unit tax on the #fish caught

Individual Transferable Quotas (ITQs) An efficient quota system will have the following characteristics: –The quotas entitle the holder to catch a specified volume of a specified type of fish. –The total amount of fish authorized by the quotas should be equal to the efficient catch level for that fishery. –The quotas should be freely transferable among fishermen.

Taxes also raise the real cost of fishing, but do so in an efficient manner. –Unlike regulations, the tax can lead to the static-efficient sustainable yield allocation because the tax revenues represent transfer costs and not real-resource costs. –Transfer costs involve the transfer of resources from one part of society to another. –For the individual fisherman, however, a tax still represents an increase in costs.

FIGURE 14.7 Effect of Regulation

TABLE 14.1 Countries with Individual Transferable Quota Systems