Public Goods and
Common Resource
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11
The Main Idea…
• Goods without a price present a challenge
• Market forces that normally allocate resources
are absent
• Private markets can’t ensure g/s is produced
and consumed in proper amounts
• Gov’t policy can potentially remedy this market
failure and increase efficiency
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Different Kinds of G/S
• When thinking about the various goods in the
economy, it is useful to group them according
to two characteristics:
• Is the g/s excludable?
• People can be prevented from using the g/s
• Is the good rival?
• One person’s use of the g/s reduces another person’s
ability to use it
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Four Categories
• Private Goods
• Are both excludable and rival.
• Ice-cream cone
• Public Goods
• Are neither excludable nor rival.
• National defense
• Common Resources
• Are rival but not excludable.
• Fish in the ocean
• Club Goods (a type of Natural Monopoly)
• Are excludable but not rival.
• Fire protection
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Volunteers, Come to the front of the
room, please and thank you. 
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Classify the goods in this
demonstration…
• What type of good was the candy bar? How do
you know?
• What type of good was the artwork? How do
you know?
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Quick Quiz #1
• In the table provided, provide at least
two examples for each type of good.
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Figure 1 Four Types of Goods
Rival?
Yes
Yes
No
Private Goods
Natural Monopolies
• Ice-cream cones
• Clothing
• Congested toll roads
• Fire protection
• Cable TV
• Uncongested toll roads
Common Resources
Public Goods
• Fish in the ocean
• The environment
• Congested nontoll roads
• Tornado siren
• National defense
• Uncongested nontoll roads
Excludable?
No
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Ponder This…
• Imagine the town of Krzyzanowskiville is thinking
about putting on a fireworks display for the 4th of July.
Each of the town’s 500 residents place a $10 value on
the experience for a total benefit of $5,000. The cost
of putting on the fireworks display is $1,000. Does it
make sense for the town of Krzyzanowskiville to put on
the display? Why or why not?
• Would it be better to leave the fireworks display up to
the private market? For example, should Eileen
Dover, a Krzyzanowskiville entrepreneur, host the
fireworks display and sell tickets to the event? Why or
why not?
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A Better Solution…
• The local gov’t in Krzyzanowskiville can sponsor the fireworks
display. The town council can raise everyone’s taxes by $2 and
use the revenue to hire Eileen Dover to produce the fireworks.
Everyone is better off by $8– the $10 at which residents value
the fireworks minus the $2 tax bill. Eileen is part of the solution
as she helps Krzyzanowskiville reach the efficient outcome as a
public employee even though she could not do so as a private
entrepreneur.
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Happy Thursday 
• Pick up two pieces of scrap paper from the front
desk. Write your name on both.
• Take out your class notes and be ready to start
when the bell rings.
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POP QUIZ!
• Copies of quiz and answer key available for
$1!!! I’ll even take an IOU. 
• NO SHARING!!!
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Reflection…
• Why were more students willing to buy the quiz
answers the first time than the second time?
• In round 1, what type of good was the quiz
answer key?
• In round 2, what type of good was the quiz
answer key?
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The Free-Rider Problem
• A free-rider is a person who receives the
benefit of a good but avoids paying for it.
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The Free-Rider Problem
• People can’t be excluded from enjoying the
benefits of a public good; some may withhold
paying for the g/s hoping others will. 
• This prevents private markets from supplying
public goods 
• National Defense
• Basic Research
• Fighting Poverty
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Three of the Most Important
Public Goods
• Why are these goods classified as public
goods? What specific characteristics make
each prone to the “free-rider” problem?
• Why do many economists support our
government in providing these particular
public goods?
• What are some potential problems?
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Solving the Free-Rider Problem
• Gov’t involvement when total benefits exceed
the costs
• Involves cost benefit analysis: compares costs and
benefits to society of providing a public good
• Why would this be a difficult job? 
• Benefits must outweigh costs or no gov’t
involvement
• Gov’t can increase efficiency by providing
public good and paying for it with tax revenue
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The Difficult Job of Cost-Benefit Analysis
• It is difficult to do because of the absence of prices
needed to estimate social benefits and resource
costs.
• The value of life, the consumer’s time, and
aesthetics are difficult to assess.
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Common Resources
• Common resources, like public goods, are not
excludable, BUT, they ARE rival goods
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Tragedy of the Commons
• Common resources tend to be used excessively when
individuals are not charged for their usage.
• Consider the story of “Town Common”
• “What is common to many is taken least care of, for all men have
greater regard for what is their own than for what they possess in
common with others.” - Aristotle
• This is similar to a negative externality. What can the
government do to fix this market failure?
• Clean air and water
• Congested roads
• Fish, whales, and other wildlife
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CASE STUDY: Why Isn’t the Cow Extinct?
• Will the market protect me?
Private
Ownership and
the Profit
Motive!
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In Conclusion: The Importance of
Property Rights
• The market fails to allocate resources
efficiently when property rights are not wellestablished (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.
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