This document discusses different types of goods and market failures related to public goods and common resources. It defines excludable and rival goods, and categorizes the four types of goods: private goods, public goods, common resources, and natural monopolies. Public goods are neither excludable nor rival, leading to free-riding problems that prevent private provision. Common resources are rival but not excludable, resulting in overuse without regulation. The document also discusses government solutions like cost-benefit analysis and congestion pricing.

2. © 2007 Thomson South-Western
Public Goods and Common Resources
• “The best things in life are free. . .”
– Free goods provide a special challenge for
economic analysis.
– Most goods in our economy are allocated in
markets…

3. © 2007 Thomson South-Western
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.

4. © 2007 Thomson South-Western
Public Goods and Common Resources
• In such cases, government policy can
potentially remedy the market failure that
results, and raise economic well-being.

5. © 2007 Thomson South-Western
THE DIFFERENT KINDS OF
GOODS
• 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?

6. © 2007 Thomson South-Western
THE DIFFERENT KINDS OF
GOODS
• 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.

7. © 2007 Thomson South-Western
THE DIFFERENT KINDS OF
GOODS
• 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

8. © 2007 Thomson South-Western
Figure 1 Four Types of Goods
Rival?
Yes
Yes
• Ice-cream cones
• Clothing
• Congested toll roads
• Fire protection
• Cable TV
• Uncongested toll roads
No
Private Goods Natural Monopolies
No
Excludable?
• Fish in the ocean
• The environment
• Congested nontoll roads
• Tornado siren
• National defense
• Uncongested nontoll roads
Common Resources Public Goods

9. © 2007 Thomson South-Western
PUBLIC GOODS
• A free-rider is a person who receives the
benefit of a good but avoids paying for it.

10. © 2007 Thomson South-Western
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.

11. © 2007 Thomson South-Western
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.

12. © 2007 Thomson South-Western
Some Important Public Goods
• National Defense
• Basic Research
• Fighting Poverty

13. © 2007 Thomson South-Western
CASE STUDY: Are Lighthouses Public
Goods?
• 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

14. © 2007 Thomson South-Western
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.

15. © 2007 Thomson South-Western
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.

16. © 2007 Thomson South-Western
COMMON RESOURCES
• Common resources, like public goods, are not
excludable. They are available free of charge
to anyone who wishes to use them.
• Common resources are rival goods because
one person’s use of the common resource
reduces other people’s use.

17. © 2007 Thomson South-Western
Tragedy of the Commons
• The Tragedy of the Commons is a parable that
illustrates why common resources get used
more than is desirable from the standpoint of
society as a whole.
• Common resources tend to be used excessively
when individuals are not charged for their usage.
• This is similar to a negative externality.

18. © 2007 Thomson South-Western
Some Important Common Resources
• Clean air and water
• Congested roads
• Fish, whales, and other wildlife

19. © 2007 Thomson South-Western
IN THE NEWS: A Solution to City
Congestion
• Motorists driving into central London on
weekdays between 7:00 A.M. and 6:30 P.M. pay a
daily tax of about $9.50.
• Cameras record license plate numbers and
nonpayers are charged stiff penalties.
• Congestion in central London has decreased by
30%.
• 50,000 fewer cars enter the eight square mile
“restricted area” each day.

20. © 2007 Thomson South-Western
CASE STUDY: Why the Cow Is Not Extinct
• What will protect me?
Private
Ownership and
the Profit
Motive!

21. © 2007 Thomson South-Western
IN THE NEWS: Should Yellowstone
Charge as Much as Disney World?
• National parks can be viewed as either public
goods or common resources.
• If park congestion is light, visits are not rival in
consumption.
• As congestion increases, park entrance fees
could be raised.
• The likely increase in revenues…
• could be used to improve national parks, and
• would encourage others to develop new parks.

22. © 2007 Thomson South-Western
CONCLUSION: THE IMPORTANCE OF
PROPERTY RIGHTS
• The market fails to allocate resources
efficiently when property rights are not well-
established (i.e. some item of value does not
have an owner with the legal authority to
control it).
• When the absence of property rights causes a
market failure, the government can potentially
solve the problem.

23. Summary
© 2007 Thomson South-Western
• 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.

24. Summary
© 2007 Thomson South-Western
• 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.

25. Summary
© 2007 Thomson South-Western
• Common resources are rival but not
excludable.
• Because people are not charged for their use of
common resources, they tend to use them
excessively.
• Governments tend to try to limit the use of
common resources.