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MBEC 6001 Pre-MBA Economics L5(1).pdf

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MBEC 6001 Pre-MBA Economics L5(1).pdf

  1. 1. MBEC 6001 Pre-Economics L5: Public Goods, Public Expenditures & Common Resources
  2. 2. Introduction • We consume many goods without paying: parks, national defense, clean air & water. • When goods have no prices, the market forces that normally allocate resources are absent. • The private market may fail to provide the socially efficient quantity of such goods. • In this case, governments can sometimes improve market outcomes.
  3. 3. Types of Goods
  4. 4. Important Characteristics of Goods • A good is excludable if a person can be prevented from using it.  Excludable: Cinema tickets, airplane tickets  Not excludable: Street lighting, national defense • A good is rival in consumption if one person’s use of it diminishes others’ use.  Rival: Fuel, food  Not rival: Museums, paintings
  5. 5. The Different Types of Goods • Using these two characteristics, most goods can be classified into four categories: Rival in Consumption? Yes No Excludable? Yes Private Goods Clothing Club Goods Cable TV No Common Resources The environment Public Goods Clean air
  6. 6. The Different Types of Goods Private Goods Jeans Hamburgers Contact lenses Public Goods Fire works Mosquito protection Traffic control Club Goods Private parks Wifi Computer software Common Goods Public roads Fish in the Ocean Public schooling Excludable & Rival in consumption Non-excludable & non-rival in consumption Excludable, but non-rival in consumption Non-excludable, but rival in consumption
  7. 7. Public Goods and Common Resources
  8. 8. Public Goods • Public goods are difficult for private markets to provide because of the free-rider problem.  Free-rider: A person who receives the benefit of a good but avoids paying for it. • If a good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good. • Result: The good is not produced, even if buyers collectively value the good higher than the cost of providing it. • There is a need for government to provide the good.
  9. 9. The Free-Rider Problem • https://www.youtube.com/watch?v=Uo51GDk8G1Q
  10. 10. Common Resources • Like public goods, common resources are not excludable:  Cannot prevent free-riders from using  Little incentive for firms to provide  There is a need for government to provide the good. • An additional problem with common resources is that they are rival in consumption:  Each person’s use reduces others’ ability to use it  There is a need for government to ensure that the good is not overused.
  11. 11. Tragedy of the Commons • https://www.youtube.com/watch?v=CxC161GvMPc
  12. 12. Public Goods and Common Resources • For both public goods & common resources, externalities arise because something of value has no price attached to it. • In this case, private decisions about consumption and production in the market can lead to an inefficient outcome. In other words, there is a market failure. • Therefore, there is a role for governments to step in to potentially raise economic well-being. An externality is the economic impact of consuming or producing a good on a third party who isn’t connected to the good (E.g. positive externality (clean air), negative externality (pollution)).
  13. 13. Reading • Textbook: Mankiw, N. (2009). Principles of economics (5th ed.). Mason, OH: Thomson South-Western Chapter 11

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