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.
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. 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. 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
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.
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. Tragedy of the Commons
• https://www.youtube.com/watch?v=CxC161GvMPc
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)).
