1. Public Goods and Common Resources

2. Characterizations of Goods, Services or Resources
Excludability:
Excludable when it is possible to prevent a person from enjoying its benefits.
accounting services
apple
diamond mine
concert.

3. Excludability:
Nonexcludable if it is virtually impossible to prevent someone from benefiting from it.
Fish in ocean
radio program
national defense
street light
air quality
Maintenance of dams and main canal in irrigation system.

4. Rivalry:
Rival if its use by one person decreases the qty available for someone else.
accounting services
apple
diamond mine
McDo-Cartier bridge on Monday morning
Air quality

5. Rivalry
Nonrival if its use by one person does not decrease the qty available for someone else.
concert (if seats left)
national defense
radio program
McDo-Cartier bridge on Sunday morning
Law and order

6. Where would you classify the following?
An idea
Trees in the forest
Music
Software
City park
Excludability is generally a question of degree that may depend on law, norms, customs, and technology of both production and protection.

7. Classification of goods
Private goods: Rival and excludable.
apple
my garden
my office
Public goods: Nonrival and nonexcludable.
national defense
law and order
street lights

8. Common resources: Rival and nonexcludable.
ocean fish
earth’s atmosphere
Natural monopolies: Nonrival but excludable.
Uncongested bridge
Uncongested cable TV
Uncongested internet
Uncongested electricity or phone grid
NB Called natural monopoly because one firm can usually provide service at lower cost than two or more firms.

9. Public goods and the free-rider problem
Free rider: A person who enjoys the benefits of a good or service without paying for it.
Little incentive to contribute towards public goods.
Public goods are generally under-supplied without gvt intervention.
What is the right amount of PG to supply?

10. Example of PG Lisa and Max Common parking No security lighting:
Nonexcludable
Nonrival
(graphic)

11. For a PubG, the SMB is the vertical sum of PMB at each qty.
For a PrivG, the SMB is the horizontal sum of PMB at each price.
Other example: Helicopters for Canadian peacekeeping

12. Public provision of PubG
Done through political process.
Example:
PubG: heli. for Peacekeeping missions
2 parties: Doves and Hawks
Hawks prefer 300 heli
Doves prefer 100 heli
Rest of electoral platforms are identical

13. Political process
Same deadweight losses: Cannot predict election outcome
Not an equilibrium…
Equil at 200 heli.
Voters are indifferent and outcome is efficient.
Example of competition in the “political market-place” which leads to efficient resource allocation.

14. Political Process
Result depends on strong assumptions of perfect info re:
how voters compare parties’ platforms
what politicians know about voters’ welfare
1. Informational problem:
When bureaucrats have different objectives than max social welfare and are better informed than voters and politicians.
eg: Bureaucrats may aim for max budget.
exaggerate costs of heli
Press for more heli
NB Remember importance of education for democracies: positive externalities.

15. 2. Rational ignorance: When voter decides not to acquire info because MC of doing so is larger than expected MB.
Large no of voters implies MB of acquiring info is small compared to MC.
Technicalities are left to bureaucrats.
Heli. builders have large incentives to be well informed and lobby politicians. They have a disproportionate influence on decision to buy heli.

16. Explaining gvt growth?
1. Changing voter preferences: Income elasticity of demand for PubG >1.
highways
airports
education
int’l peacekeeping

17. 2. Inefficient provision:
Bureaucrats aim at budget max in the presence of rational voter ignorance.

18. COMMON RESOURCES
When resources are owned in common in such a way that they can be freely accessed, they will tend to be overexploited.
cod fisheries in Atlantic
GHG in atmosphere
forest in the Amazon
Why?

19. Ex: The Fishery
The free access equilibrium (2 graphics)

20. The Fishery
The MPB is the catch that one fisher gets when he goes with his boat.
The MSB is the increase in the total catch of the fishery from that additional boat.
MSB accounts for the fact that adding a boat reduces the catch of all other boats.

21. At the individual (private) level, each fisher does not account for the effect he has on other fishers.
He only cares about his own catch.
Negative externality
NB After 5000 boats, MSB is actually negative! How is that possible?

22. Efficient use implies MPB>MC :
Tragedy of the Commons: Takes place when large number of people access a resource without any restriction.
Incentives to conserve are virtually absent: If I don’t catch the fish, someone else will.
Efficient use implies MPB>MC :
Individual incentives to overfish

23. Achieving efficiency 4 types of solutions: Property rights Quotas ITQs
Managed CPR

24. 1. The property rights solution
Give the fishery to one person: Social and private benefits coincide.
Efficient
NB The problem was again one of absence of PR over a resource.
Other ex: Frequency spectrum for cell phones
gvt assigns PR through auctions

25. Problem with private PR:
How does one enforce PR on the Atlantic?
Amazonian forest?
Atmosphere?
A River?
Calls for more direct gvt intervention.

26. Quotas Set no. of boats at 4000. Efficient
Incentives to cheat may be large at 4000 boats.
Requires monitoring
Is no. of boats easier to verify than pure exclusion?
Iceland: Limiting no. of boats led boat owners to saw boats in two and make them longer to carry more fish… Inefficient

27. Individual Transferable Quotas
Same idea as transferable emissions permits
NB Not clear why this would reduce monitoring costs. Maybe because quotas will go to those who value them most?

28. Managed CPRs (Esp in LDCs)
Property in common but entry is not free.
Community has rules, social norms, customs, that can be enforced, including quotas.
People are punished for violating those rules.
Is a managed common a private PR with many owners or gvt intervention?