Chapter 19
Public Goods and the
Tragedy of the
Commons
MODERN PRINCIPLES OF ECONOMICS
Third Edition
Outline
Four Types of Goods
Private Goods and Public Goods
Nonrival Private Goods Common
Resources and the Tragedy of the
Commons
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Introduction
On September 29, 2004, asteroid Toutatis
narrowly missed Earth.
Markets provide all kinds of
goods like food, clothing, and
cell phones.
Even if everyone were
convinced of the benefits of
deflecting asteroids, the
market will probably never
provide asteroid deflection.
i.e. market failure
NASA/JPL-CALTECH
Asteroid Toutatis
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Definition
Nonexcludable:
a good is nonexcludable if people who
don’t pay cannot be easily prevented
from using the good.
Example: National Defense
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Definition
Nonrival:
A good is nonrival if one person’s use of
the good does not reduce the ability of
another person to use the same good.
Example: Digital music
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Introduction
Asteroid deflection is a public good:
• Nonexcludable – nonpayers can’t be excluded
from enjoying the benefits.
• Nonrival – many people can enjoy the benefits
of the same asteroid deflection.
A pair of jeans are an example of a private good:
• Nonpayers can be excluded from consuming
them.
• Only one person can wear them at a time.
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Four Types of Goods
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Self-Check
A fireworks display is an example of a:
a. Public good.
b. Private good.
c. Common resource.
Answer: a – a fireworks display is a public good
because it is both nonrival and nonexcludable.
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Definition
Private goods:
are excludable and rival.
Public goods:
are nonexcludable and nonrival.
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Private Goods
Since private goods are excludable, there is an
incentive to pay for and thus to produce them.
Private goods can therefore be provided by the
market.
Excludability doesn’t result in inefficiency.
The only people who will be excluded from
consuming a private good are the people who are
not willing or able to pay what it costs to produce.
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Public Goods
Since public goods are nonexcludable, it’s
difficult to get people to pay for them voluntarily.
Markets will tend to underprovide public goods.
Public goods are also nonrival, which means that
one person’s use doesn’t reduce the ability of
another person to use the good.
7 billion people can be protected from an asteroid
for the same cost as protecting 1 million people.
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Definition
Free rider:
someone who enjoys the benefits of a
public good without paying a share of
the costs.
Forced rider:
someone who pays a share of the costs
of a public good but who does not enjoy
the benefits.
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Public Goods
Because public goods are nonexcludable, some
people will free ride.
If people free ride, the good will be underprovided
by the market.
By taxing everyone to pay for the public good,
government can make people better off.
However, public goods provided via
government/taxation should be determined to be
cost-effective
Taxation means that some people will be turned
into forced riders.
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Public Goods
If the government provides the public good, how
much should it produce?
Ideally, the amount that maximizes total surplus
i.e. Societal benefits need to be larger than
societal costs
The total benefit of a public good is the sum of the
benefits to each individual.
How will the government know how much each
person values the good?
Voting and other democratic processes can help
to produce optimal amounts of public goods.
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Public Goods
Is healthcare a public good?
Very important service
Is it excludable? Is it rival?
Healthcare is a Private Good by definition
Are there Free Riders with the ACA?
Note: Just because government provides a good,
does not mean it is a public good
Even essential goods (electricity) are not
necessarily public goods
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Self-Check
Someone who enjoys the benefits of a public
good without paying some of the cost is called a:
a. Public good consumer.
b. Forced rider.
c. Free rider.
Answer: c – someone who enjoys a public good
without paying the cost is called a free rider.
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Definition
Nonrival Private goods:
goods that are excludable but nonrival.
Sometimes called Club Goods
Examples: Cable TV, wi-fi, digital music
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Nonrival Private Goods
Nonrival Private goods like television, music, and
software are excludable but nonrival.
Markets can provide club goods, but will be
inefficient.
Some people who are willing to pay the cost (MC) but
not the market price will be excluded.
MC can be very low, near zero, but price prevails
Entrepreneurs try to find ways to:
• Turn public goods into club goods.
• Profit from nonrival goods without relying on
exclusion.
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Nonrival Private Goods
Are radio/TV public goods or private goods?
• Excludable? No
• Rival? No
• Must be Public Goods
How can the market provide public goods?
Some public goods such as radio and television
programs are provided by markets.
Advertisers pay for the costs of the good that is
then given away for free.
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Nonrival Private Goods
Some nonrival goods such as Google searches
are provided free even when they are excludable.
Other goods such as wifi are sold by private firms,
paid for by advertising, given away to attract
customers, or provided by local governments.
Markets can provide these goods but do so at an
inefficient level.
Entrepreneurs sometimes find clever ways to
profit from nonrival private goods, even without
exclusion.
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Definition
Common resources:
goods that are nonexcludable but rival.
Examples: the environment, public
roads, fish in the ocean (tuna)
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Tragedy of the Commons
Until they are caught, tuna are unowned and
hence nonexcludable.
But tuna are not public goods – when one person
consumes a tuna, there is less for others.
Can you say “negative externality?”
Without ownership, there is very little incentive to
conserve.
There is a strong incentive to consume these
resources before others.
Tuna are being driven towards extinction.
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Tragedy of the Commons
Since 1960, the tuna catch has decreased by 75%.
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Tragedy of the Bunnies
Tragedy of the Bunnies
You are a bunny merchant, and the way you make a living is
to sell adorable bunnies to little children each year (you sell
bunnies by clicking on them).
The “tragedy of the bunnies” game is played in two rounds
(two consecutive seasons). After the first round, the
remaining bunnies triple in number (they are bunnies, after
all).
In the game, you compete against two other bunny
merchants. Your goal is to bring the most bunnies to market
that you can by the end of round two.
There are two versions of this game – public bunnies, and
private bunnies. After playing both versions of the game,
you will understand the “tragedy of the bunnies.”
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Tragedy of the Bunnies
Tragedy of the Bunnies game:
Public and Private versions
Two rounds of play
Bunnies at the end of Round 1 multiply X 3
Winner – whoever has the most bunnies at the
end
http://bunnies.learnliberty.org/
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Tragedy of the Commons
The result of nonexcludability and rivalry is often
overexploitation and undermaintenance.
When resources are unowned, users do not invest in
maintenance because the benefits are mostly external.
Game preserves (private property) protect endangered
species in Africa, etc
Will chickens ever go extinct?
“No one ever washed a rental car.”
• i.e. If you don’t own it, you don’t take care of it.
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Definition
Tragedy of the commons:
the tendency of any resource that is unowned
and hence nonexcludable to be overused and
undermaintained.
http://www.garretthardinsociety.org/articles/art
_tragedy_of_the_commons.html
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Managing Common Resources
Elinor Ostrom found that all
over the world, groups have
avoided the tragedy of
overfishing or overgrazing
through the enforcement of
norms.
This is more difficult to do
when a lot of unrelated
people have access to the
common resource.
© EPA EUROPEAN PRESSPHOTO AGENCY B.V./ALAMY
Elinor Ostrom
Winner of the Nobel Prize
in Economics in 2009
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Communal Property
The first Thanksgiving in America: A
celebration of private property?
The Pilgrims and Property Rights:
https://www.youtube.com/watch?v=66QdQErc8JQ&feature=youtu.be
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Communal Property
The first Thanksgiving definitively illustrates the
crippling problems with collectivism and the solution
consisting of property rights.
Communal property resulted in half the settlers
starving to death in 1620. Governor Bradford
instituted private property and the Tragedy of the
Commons was reversed - something to celebrate!
The solution to the Tragedy of the Commons
is to avoid unowned or collective resources.
http://www.forbes.com/sites/jerrybowyer/2012/11/21/how-a-failedcommune-gave-us-what-is-now-thanksgiving/
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Command and Control
Command and control has been used to solve
the tragedy of the commons problems.
In 1968, British Columbia limited boats to protect
their salmon fishery.
Fishermen used “capital stuffing” – more
powerful engines and better electronics for
finding fish.
The value of the typical fishing boat tripled but
the salmon fishery continued to decline.
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Tradable Allowances
Property rights as a possible solution:
In 1986, New Zealand tried individual
transferable quotas (ITQs).
Each owner of an ITQ had the right to catch a
certain tonnage of fish.
The sum of ITQs added up to the total allowable
catch, and ITQs could be bought and sold.
The scheme was successful and the fish catch
increased.
Many similar programs have being instituted.
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Tradable Allowances
ITQs
begin in
1986
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Self-Check
The tendency for common resources to be
overused and undermaintained is called:
a. Tragedy of the commons.
b. Command and control.
c. Tradable allowances.
Answer: a – this tendency is called the tragedy
of the commons.
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The Big Commons – Global Warming
The ocean of air (atmosphere) is the
commons.
Everyone deposits CO2 into the commons
(non-excludable but rival)
Some scientists claim this will cause serious
environmental damage, somewhere in 50 to
200 years.
All countries must participate for a solution but
huge equity issues will block cooperation
• Poor countries need electricity, economic
development and funding from rich countries
• Rich countries can’t pay without voter revolts
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The Big Commons – Global Warming
Best solution: monitor, evaluate, innovate?
• Where will technology be in 50 years?
Climate models are significantly over-predicting warming
at this point
Do we need one world government (totalitarian) control?
• “Degrowth”
• People in wealthy countries must be forced to give up
comfortable lifestyles under current policy proposals (even
poor people in rich countries)
• This collectivist solution is not being debated/discussed
openly as of yet.
“The urge to save humanity is almost always a
false front for the urge to rule.“
- H. L. Mencken
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Takeaway
Public goods are valuable but markets will often
undersupply these goods.
Public goods are nonexcludable and nonrival;
nonexcludability is usually the more important
problem.
The benefit of providing public goods is an
argument for government taxation and supply.
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Takeaway
A resource that is nonexcludable but rival will
tend to be overused and under maintained.
Sometimes there are creative solutions to the
tragedy of the commons, such as instituting new
property rights.
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