This document discusses public goods, common resources, and market failures. It begins by defining private goods, public goods, and common resources based on whether they are excludable and rival. Public goods are characterized by non-excludability and non-rivalry, which leads to underprovision in the free market due to free-riding. Common resources are non-excludable but rival, leading to overexploitation as seen in the "tragedy of the commons." The document explores how government provision can potentially remedy these market failures, though bureaucratic incentives may still lead to over- or underprovision of public goods.

2. Public Goods and
Common Resources
CHAPTER
11

3. CHAPTER CHECKLIST
When you have completed your study of this
chapter, you will be able to
1
Distinguish among private goods, public goods, and
common resources.
2
Explain the free-rider problem and how public provision
can help to overcome that problem.
3
Explain the tragedy of the commons and review the
possible solutions to that problem.

4. 11.1 CLASSIFYING GOODS AND RESOURCES
What is the essential difference between:
• A city police department and Brink’s security
• Fish in the Pacific Ocean and fish in a fish farm
• A live concert and a concert on television
These, and all goods and services, can be classified
according to whether they are excludable or
nonexcludable and rival or nonrival.

5. 11.1 CLASSIFYING GOODS AND RESOURCES
Excludable
A good, service, or resource is excludable if it is
possible to prevent a person from enjoying its benefits.
A good, service, or resource is nonexcludable if it is
impossible to prevent a person from benefiting from it.

6. 11.1 CLASSIFYING GOODS AND RESOURCES
Examples of excludable items are
• The security services of Brink’s
• Fish in a fish farm
• A live concert
Examples of nonexcludable items are
• The services of the city police department
• Fish in the Pacific Ocean
• A concert on network television

7. 11.1 CLASSIFYING GOODS AND RESOURCES
Rival
A good, service, or resource is rival if its use by one
person decreases the quantity available to someone
else.
A good, service, or resource is nonrival if its use by
one person does not decrease the quantity available to
someone else.

8. 11.1 CLASSIFYING GOODS AND RESOURCES
Examples of rival items are
• The services of Brink’s security
• Fish both in ocean and in a fish farm
• A seat at a live concert
Examples of nonrival items are
• The protection provided by a city police
department
• A concert on network television

9. 11.1 CLASSIFYING GOODS AND RESOURCES
A Fourfold Classification
Private Goods
A private good is a good or service that can be
consumed by only one person at a time and only by
those people who have bought it or own it.
A private good is both rival and excludable.
For example, a can of coke.

10. 11.1 CLASSIFYING GOODS AND RESOURCES
Public Goods
A public good is a good or service that can be
consumed simultaneously by everyone and no one can
be excluded from enjoying its benefits.
It is both nonrival and nonexcludable.
For example, a flood-control levee.

11. 11.1 CLASSIFYING GOODS AND RESOURCES
Common Resources
A common resource is a resource that can be used
only once but no one can be prevented from using what
is available.
It is both rival and nonexcludable.
For example, fish in the Pacific Ocean.

12. 11.1 CLASSIFYING GOODS AND RESOURCES
Natural Monopoly
A good or service that is both nonrival and excludable is
produced by a natural monopoly.
A natural monopoly is a firm that produces at lower cost
than two or more firms can.

13. 11.1 CLASSIFYING GOODS AND RESOURCES
Figure 11.1
shows this
fourfold
classification
of goods and
services.

14. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
11.1 PUBLIC GOODS
The Free-Rider Problem
Public goods create a free-rider problem.
A free rider is a person who enjoys the benefits of a
good or service without paying for it.
Because of the free-rider problem, the market would
provide too small a quantity of a public good.
To produce the efficient quantity, government action is
required.

15. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
The Marginal Benefit of a Public Good
The benefit a public good provides is the value of its
services.
Because security lights in a common parking area are
nonrival and nonexcludable, they are a public good.
• Everyone consumes the same quantity of them.
To find the economy-wide value of the security lights,
we add together the marginal benefits of everyone who
benefits from them.

16. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Figure 11.2 shows how to
find an economy’s MB curve.
Lisa’s marginal benefit curve
is MBL.
Max’s marginal benefit curve
is MBM.
The MB curve for the
economy is the vertical sum
of the marginal benefit
curves of everyone in the
economy—Lisa and Max.

17. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
The Marginal Cost of a Public Good
Marginal cost increases as the quantity of a public good
produced increases—the principle of increasing
marginal cost.
So the marginal cost curve of public good slopes
upward.

18. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
The Efficient Quantity of a Public Good
Resources are used efficiently if marginal benefit equals
marginal cost.
If marginal benefit exceeds marginal cost, resources can
be used more efficiently by increasing the quantity
produced.
If marginal cost exceeds marginal benefit, resources can
be used more efficiently by decreasing the quantity
produced.

19. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Figure 11.3 shows the
efficient quantity of a public
good—surveillance satellites.
1. If MB exceeds MC, an
increase in the quantity will
make resource use more
efficient.
2. If MC exceeds MB, a
decrease in the quantity
will make resource use
more efficient.

20. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
3. If MB equals MC, resource
use is efficient.
4. The efficient quantity is 200
satellites.
5. Private provision leads to
underproduction—in the
extreme, to zero production.

21. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Private Provision: Underproduction
No one would have an incentive to buy his or her share
of the satellite system—the free-rider problem.
So a private firm would not supply satellites.
Public Provision: Efficient Production
The political process determines the quantity of a
public good provided—this quantity might be efficient
or inefficient.

22. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Figure 11.4(a) shows the
preferences of two political
parties in an election.
1. Doves would like to provide
100 satellites.
2. The Hawks would like to
provide 300 satellites.

23. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Figure 11.4(b) shows an
efficient political outcome.
3. The political outcome is 200
satellites because, unless
each party proposes 200
satellites, the other party can
beat it in the election.

24. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Principle of Minimum Differentiation
The principle of minimum differentiation is the
tendency for competitors to make themselves identical
to appeal to the maximum number of clients or voters.

25. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Public Provision: Overproduction
Bureaucrats translate the choices of politicians into
programs and control the day-to-day activities that
deliver public goods.
The behavior of bureaucrats modifies the political
outcome.

26. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Objective of Bureaucrats
The bureau’s goal is to
maximize its budget.
1. The efficient quantity is 200
satellites.
If the bureau is successful in the
pursuit of its goal, the politicians
provide 300 satellites.
2. With 300 satellites, marginal
cost exceeds marginal
benefit.

27. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
3. With 300 satellites,
inefficient overproduction
occurs.

28. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Why don’t the politicians block the bureaucrats?
Rational Ignorance
Rational choice balances marginal benefit and
marginal cost.
An implication of rational choice is rational ignorance.
Rational Ignorance is the decision not to acquire
information because the marginal cost of doing so
exceeds the expected marginal benefit.

29. 11.2 PUBLIC GOODS AND FREE-RIDER PROBLEM
Why Government Is Large
Part of the reason why government is large is
• Inefficient overprovision of public goods
• Voters’ rational ignorance
Once a bureaucracy gets established, its goal of budget
maximization combined with voters’ rational ignorance
explains why government takes a large proportion of
total income.

30. 11.3 COMMON RESOURCES
The Tragedy of the Commons
The tragedy of the commons is the absence of
incentives to prevent the overuse and depletion of a
commonly owned resource.
Examples include the Atlantic Ocean cod stocks, South
Pacific whales, and the quality of the earth’s
atmosphere.
The traditional example from which the term derives is
the common grazing land surrounding middle-age
villages.

31. 11.3 COMMON RESOURCES
Figure 11.6 illustrates the
sustainable production of
fish.
As the number of fishing
boats increases, the
sustainable quantity of
fish caught increases to
some maximum and then
decreases.
Beyond that maximum
sustainable catch, there
is overfishing.

32. 11.3 COMMON RESOURCES
Figure 11.7 shows why
overfishing occurs.
1. The average catch per
boat, which is the
marginal private benefit,
MB, decreases as the
number of boats
increases.
2. The marginal cost per
boat is MC (assumed
constant).

33. 11.3 COMMON RESOURCES
3. Equilibrium occurs
where marginal private
benefit, MB, equals
marginal cost, MC.
The equilibrium number of
boats fishing is 8,000 and
overfishing occurs.
Overfishing occurs because
no one takes into account
the effects of her/his actions
on other users of the
resource.

34. 11.3 COMMON RESOURCES
The Efficient Use of the Commons
The quantity of fish caught by each boat decreases as
the number of boats increases.
But no one has an incentive to take this fact into
account when deciding whether to fish.
The efficient use of a common resource requires
marginal cost to equal marginal social benefit.

35. 11.3 COMMON RESOURCES
Marginal Social Benefit
Marginal social benefit is the increase in total fish catch
that results from an additional boat.
The marginal social benefit is not the average catch per
boat, which is the marginal private benefit.
Table 11.1 on the next slide shows the calculation of
marginal social benefit.

36. 11.3 COMMON RESOURCES
Boats
A
Total Catch
0
MSB
0
90
B
1
90
70
C
2
160
50
D
3
210
30
E
4
240

37. 11.3 COMMON RESOURCES
Efficient Use
Figure 11.8 illustrates the
efficient use of a common
resource.
1. At each number of boats,
the marginal social benefit
curve, MSB, is below the
MB curve.
2. The resource is used
efficiently when MSB
equals MC.

38. 11.3 COMMON RESOURCES
Achieving an Efficient Outcome
It is harder to achieve an efficient use of a common
resource than to define the conditions under which it
occurs.
Three methods in use are
• Property rights
• Quotas
• Individual transferable quotas (ITQs)

39. 11.3 COMMON RESOURCES
Property Rights
By assigning property rights, common property becomes
private property.
When someone owns a resource, the owner is
confronted with the full consequences of her/his actions
in using that resources.
The social benefits become the private benefits.

40. 11.3 COMMON RESOURCES
Figure 11.8 shows that
with property rights,
1. The marginal social
benefit curve, MSB,
becomes the marginal
private benefit curve.
2. The resource is used
efficiently because the
owner of the resource
is best off when MSB
equals MC.

41. 11.3 COMMON RESOURCES
Quotas
By setting a production
quota at the efficient
quantity, a common
resource might remain in
common use but be used
efficiently.
Figure 11.9(a) shows this
situation.
It is hard to make a quota
work.

42. 11.3 COMMON RESOURCES
Individual Transferable Quotas
An individual transferable quota (ITQ) is a
production limit that is assigned to an individual who is
free to transfer the quota to someone else.
A market emerges in ITQs.
If the efficient quantity of ITQs is assigned, the market
price of a quota confronts resource users with a marginal
cost that equals MSB at the efficient quantity.

43. 11.3 COMMON RESOURCES
Figure 11.9(b) shows the
situation with an efficient
number of ITQs.
The market price of an ITQ
increases the marginal
cost from MC0 to MC1.
Users of the resource
make marginal private
benefit, MB, equal to
marginal private cost, MC1,
and the outcome is
efficient.