1. Public Goods and Common Resources

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. Mid-Term Exam #2 Review Feb 27, 2004
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/ me immediately.

10. 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 C

11. 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?