Chp 11 1


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Chp 11 1

  1. 1. © 2007 Thomson South-Western
  2. 2. Public Goods and Common Resources• When goods are available free of charge, the market forces that normally allocate resources in our economy are absent.• When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in the proper amounts. © 2007 Thomson South-Western
  3. 3. Public Goods and Common Resources• In such cases, government policy can potentially remedy the market failure that results, and raise economic well-being. © 2007 Thomson South-Western
  4. 4. THE DIFFERENT KINDS OFGOODS• When thinking about the various goods in the economy, it is useful to group them according to two characteristics: – Is the good excludable? – Is the good rival? © 2007 Thomson South-Western
  5. 5. THE DIFFERENT KINDS OFGOODS• Excludability – refers to the property of a good whereby a person can be prevented from using it.• Rivalry in consumption – refers to the property of a good whereby one person’s use diminishes other people’s use. © 2007 Thomson South-Western
  6. 6. THE DIFFERENT KINDS OFGOODS• Four Types of Goods – Private Goods • Goods that are both excludable and rival in consumption – Public Goods • Goods that are neither excludable nor rival in consumption – Common Resources • Goods that are rival in consumption but not excludable – Natural Monopolies • Goods that are excludable but not rival in consumption © 2007 Thomson South-Western
  7. 7. Figure 1 Four Types of Goods Rival? Yes No Private Goods Natural Monopolies Yes • Ice-cream cones • Fire protection • Clothing • Cable TV • Congested toll roads • Uncongested toll roadsExcludable? Common Resources Public Goods No • Fish in the ocean • Tornado siren • The environment • National defense • Congested nontoll roads • Uncongested nontoll roads © 2007 Thomson South-Western
  8. 8. PUBLIC GOODS• A free-rider is a person who receives the benefit of a good but avoids paying for it. © 2007 Thomson South-Western
  9. 9. The Free-Rider Problem• Since people cannot be excluded from enjoying the benefits of a public good, individuals may withhold paying for the good hoping that others will pay for it.• The free-rider problem prevents private markets from supplying public goods. © 2007 Thomson South-Western
  10. 10. The Free-Rider Problem• Solving the Free-Rider Problem • The government can decide to provide the public good if the total benefits exceed the costs. • The government can make everyone better off by providing the public good and paying for it with tax revenue. © 2007 Thomson South-Western
  11. 11. Some Important Public Goods• National Defense• Basic Research• Fighting Poverty © 2007 Thomson South-Western
  12. 12. CASE STUDY: Are Lighthouses PublicGoods? • Benefit is neither excludable nor rival in consumption for ship captains • Because of free-rider problem, private • markets generally don’t provide lighthouses • 19th century England, lighthouse owners charged local port • If port didn’t pay, light turned off • Ships avoided that port © 2007 Thomson South-Western
  13. 13. The Difficult Job of Cost-Benefit Analysis• Cost-benefit analysis refers to a study that compares the costs and benefits to society of providing a public good.• In order to decide whether to provide a public good or not, the total benefits of all those who use the good must be compared to the costs of providing and maintaining the public good. © 2007 Thomson South-Western
  14. 14. The Difficult Job of Cost-Benefit Analysis• A cost-benefit analysis would be used to estimate the total costs and benefits of the project to society as a whole. • It is difficult to do because of the absence of prices needed to estimate social benefits and resource costs. • Without accurate prices, it is difficult to assess attributes like… • the value of life • the value of consumers’ time, and • the aesthetics of public good projects. © 2007 Thomson South-Western
  15. 15. Summary• Goods differ in whether they are excludable and whether they are rival. – A good is excludable if it is possible to prevent someone from using it. – A good is rival if one person’s enjoyment of the good prevents other people from enjoying the same unit of the good. © 2007 Thomson South-Western
  16. 16. Summary• Public goods are neither rival nor excludable.• Because people are not charged for their use of public goods, they have an incentive to free ride when the good is provided privately.• Governments provide public goods, making quantity decisions based upon cost-benefit analysis. © 2007 Thomson South-Western