Public Goods and Common
Resources
November 28, 2006
Reading: Chapter 20
This topic examines public goods and other related
goods (common resources and artificially scarce
goods) which are unlikely to be provided at their
optimal levels by markets. It also examines how
government policies can address the problem.
Public Goods and Common
Resources
a. Characteristics of private and other
goods
b. Public goods
c. Provision of public goods
d. Common resources and the tragedy of
the commons
e. Artificially scarce goods
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Characteristics of Private and Other Goods
Goods can be classified according to two attributes:
1. Whether they are excludable: its supplier can prevent people
who do not pay for it from consuming it.
2. Whether they are rival in consumption: if the same unit of
the good cannot be consumed by more than one person at the
same time.
By this
classification
there are four
types of
goods, each
with different
characteristics:
private goods,
public goods,
common
resources and
artificially
scarce goods.
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Characteristics of private and other goods
Markets and efficiency
Private goods are those that are both excludable and rival in
consumptionÆ they are efficiently produced and consumed in a
competitive market.
When goods are nonexcludable, there is a free-rider problem
because of which consumers will not want to pay producers Æ
inefficiently low production.
When goods are nonrival in consumption, the efficient price for
consumption is zero since the marginal cost of providing good is zero
and the marginal benefit is positive. But if producers charge a positive
price is charged to cover the cost of production Æ inefficiently low
consumption.
So private goods are the only goods which can be efficiently produced
and consumed in competitive markets. Although most goods are
private goods, many goods are of the other three types.
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Public Goods
A public good is a good that is both nonexcludable and
nonrival in consumption. Examples:
Disease prevention: when infectious and contagious diseases
are prevented everyone is protected from disease.
National defense: when a nation is defended, everyone in the
nation is defended.
Scientific research: more knowledge benefits everyone.
Television broadcasting: everyone can watch free.
Private firms will not produce it at all, under-produce it, or not
produce it the way consumers want it. Sometimes non-profit
organizations with public contributions can provide it. Small
communities can provide it with donations and volunteers. TV can
work with advertisments.
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Providing Public Goods
Some public goods require either-or decisions. For others, the amount needs
to be chosen. How much of a public good should be provided? The marginal
social benefit of an additional unit of a public good is equal to the sum of
each consumer’s individual marginal benefit from that unit. At the
efficient quantity, the marginal social benefit equals the marginal
cost.
No individual has an
incentive to pay for
providing the efficient
quantity of a public
good because each
individual’s marginal
benefit is less than the
marginal social benefit.
Problem is acute when
there are many people.
This is a primary
justification for the
existence of
government.
Government pays from
tax revenue.
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Providing Public Goods
Cost-benefit analysis: estimating the social costs and social
benefits of providing a public good. Estimating costs are
relatively easy, but benefits are more difficult: how much is it
worth to everyone? Individuals tend to overstate the good’s
value to them, because they don’t have to pay for it themselves.
Voting does not necessarily provide an answer. Voting is not
done on a single issue. Moreover, even if it is, people may not
want to vote at all, because they will have to make an effort to
vote, while their expected benefit is small – since they believe
that their vote will not make a difference. Yet people do vote.
This is called the voting paradox.
In general, if there are many people who want something, they
will have collective action problem because of the free rider
problem. Smaller groups with strong interests find it easier to
unite.
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Common Resources
Common resources: nonexcludable and rival in consumption
The problem of overuse – tragedy of the commons: a user depletes the
amount of the common resource available to others but does not take this
cost into account when deciding how much to use the common resource
Each fisherman’s
individual marginal cost
does not include the
cost that his or her
actions impose on
others: the depletion of
the common resource
Æ the marginal social
cost curve, MSC, lies
above the supply curve;
in an unregulated
market, the quantity of
the common resource
used, QMKT, exceeds the
efficient quantity of use,
QOPT. Just like an
externality.
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Common Resources
Efficient provision and maintenance
Efficient provision and maintenance requires getting individual
users of the resource to take into account the costs they
impose on other users. Methods include:
1. Tax or otherwise regulate the use of the common resource:
Pigouvian taxes or congestion charges.
2. Create of a system of tradable licenses for the right to use
the common resource. Works for fisheries.
3. Make it excludable by assigning property rights. People will
not overuse it, because overuse leads to future losses. But
there are difficulties. (1) How to assign property rights?
Corruption, equity. (2) Enforcing property rights by guarding
may be inefficient – poaching. (3) Sometimes local inhabitants
have more at stake and introduce conservation methods and
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private companies can over-extract and leave the area.
Artificially Scarce Goods
An artificially scarce good is
excludable and nonrival in
consumption. Examples:
pay-per-view movies,
computer soft-ware and
other information goods.
Similar to a natural
monopoly.
Even though the marginal
cost is zero, producers have
fixed costs, which may be
quite high.
Either there will be
inefficiency, or fixed costs
will not be covered.
Governments can provide
free, or have some
inefficiency.
It is made artificially scarce because producers charge a positive
price but the marginal cost of allowing one more person to
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consume the good is zero, so efficiency requires providing it free.