Chapter
Public Goods
and Common
Resources
CHAPTER IN PERSPECTIVE
10
Chapter 10 studies the types of goods and services that the government provides.
■ Distinguish between public goods, private goods, and common resources.
An excludable good or service is one for which it is possible to prevent someone from consuming it; a
nonexcludable good or service is one for which it is impossible to prevent someone from consuming it.
A rival good or service is one for which its consumption by one person decreases its consumption by
other people; a nonrival good or service is one for which its consumption by one person does not decrease its consumption by other people. 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
excludable and rival. A public good is a good or service that can be consumed simultaneously by everyone and from which no one can be excluded. A public good is nonexcludable and nonrival. A common resource is a resource that is nonexcludable and rival.
■ Explain the free-rider problem and how public provision can help to
overcome that problem.
Public goods create a free-rider problem, a person who enjoys the benefits of a good or service without
paying for it. The economy’s marginal benefit curve of a public good is the vertical sum of the individual marginal benefit curves. The efficient quantity of a public good is the quantity where marginal
benefit equals marginal cost. The tendency for political parties to propose identical policies to appeal
to the maximum number of voters is an example of the principle of minimum differentiation. Rational
ignorance is the decision not to acquire information because the marginal cost of doing so exceeds the
expected marginal benefit. Rational ignorance, combined with the bureaucratic desire to maximize
budgets, can lead to inefficient overprovision of public goods.
■ Explain the problem of the commons and review the possible solutions to that
problem.
Common resources suffer from the problem of the commons, the absence of incentives to prevent the
overuse and depletion of a commonly owned resource. Fish are an example of a common resource. The
marginal private benefit of an additional boat is that boat’s catch. But the quantity of fish caught by
each boat decreases as more boats fish. The marginal social benefit of an additional boat is the change
in the total catch that results from that additional boat. Efficiency occurs when the marginal social
benefit from a resource equals its marginal cost. But the marginal social benefit is less than the marginal private benefit, so in an unregulated market overuse of the resource occurs. The government can
help bring about an efficient use of the common resource by assigning property rights to the resource,
or by setting quotas on the amount of the resource that can be used, or by creating a program of individual transferable quotas (ITQ). An individual transferable quota is a production limit that the owner
can transfer to someone else.
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Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY
EXPANDED CHAPTER CHECKLIST
When you have completed this chapter,
you will be able to:
1 Distinguish between public goods,
private
goods,
resources.
•
•
and
common
Define nonrival and rival, and nonexcludable and excludable.
Define public good, private good, and
common resource and discuss how they
differ along the two dimensions of rivalry
and excludability.
2 Explain the free-rider problem and
how public provision can help to
overcome that problem.
•
•
KEY TERMS
•
•
•
•
•
•
•
•
•
•
•
•
Excludable (page 232)
Nonexcludable (page 232)
Rival (page 232)
Nonrival (page 232)
Private good (page 232)
Public good (page 233)
Common resource (page 233)
Free rider (page 235)
Principle of minimum differentiation (page
240)
Rational ignorance (page 241)
Problem of the commons (page 244)
Individual transferable quota (ITQ) (page 249)
CHECKPOINT 10.1
Explain the free-rider problem.
Describe how the marginal benefit for a
public good is calculated.
Explain why the economy’s marginal benefit curve for a public good is different from
the market demand curve for a private
good.
Show on a figure the efficient quantity of a
public good.
Define the principle of minimum differentiation and explain how it applies to the
proposals of political parties.
Define rational ignorance.
Explain why the government is large and
growing.
■ Distinguish between public goods,
private
goods,
and
common
resources.
3 Explain the problem of the com-
Quick Review
• Public good A public good is nonrival and
nonexcludable.
• Private good A private good is rival and
excludable.
• Common resource A common resource is
rival and nonexcludable.
Classify the following goods as public goods,
a private good, or a common resource:
a. Measles vaccination
A measles vaccination is in part a private good
and in part a public good. It is a private good
•
•
•
•
•
mons and review the possible solutions to that problem.
•
•
•
•
Define the problem of the commons.
Discuss why the marginal private benefit of
a common resource exceeds the marginal
social benefit of the resource.
Illustrate and describe why a common resource is overused.
Discuss how property rights, quotas, and
individual transferable quotas can result in
the efficient use of a common resource.
Practice Problem 10.1
Classify the following goods as public goods, a
private good, or a common resource:
a. Measles vaccination
b. Fire protection
c. A Big Mac
d. The Mississippi River
Solution to Practice Problem 10.1
The Practice Problem gives practice recognizing
public goods, private goods, and common resources and the two dimensions along which
they are distributed.
Chapter 10 . Public Goods and Common Resources
because it is rival since only one person can
consume a particular vaccination. It is a public
good because a person who is vaccinated benefits others because they are less likely to catch
the measles.
b. Fire protection
Fire protection is a public good. It is nonrival
because protecting one property against fire,
say by cutting dry weeds, also protects others
and it is nonexcludable, because once the weeds
are cut, everyone is protected.
c. A Big Mac
A Big Mac is a private good.
d. The Mississippi River
The Mississippi River is a common resource. It
is rival, because one large oil tanker cannot use
the same river space as another large oil tanker,
and it is nonexcludable.
Additional Practice Problem 10.1a
It’s a balmy, pleasant Sunday afternoon on a fall
day on Long Island, where the U.S. Open Tennis
Men’s Singles Finals are being played. A variety
of goods and services are being consumed. Classify each of the list of goods and services as rival,
nonrival, excludable, and nonexcludable. State if
any are public or private goods.
a. U.S. Lawn Tennis Association membership
b. tennis lessons
c. racquets
d. watching the Men’s Singles Championship
e. a pleasant, sunny afternoon
f. sunset seen over Fire Island
g. shrimp eaten at a tailgate party
Solution to Additional Practice Problem 10.1a
a. U.S. Lawn Tennis Association membership
Membership in the U.S. Lawn Tennis Association is nonrival and excludable.
b. tennis lessons
Tennis lessons are rival and excludable and are
a private good.
c. racquets
Racquets are rival and excludable and hence are
a private good.
147
d. watching the Men’s Singles Championship
Watching the Men’s Singles Championship is
excludable. Whether it is rival depends on
whether the match is a sell out. If it is a sell out,
then watching the championship is rival; in the
event that it is not sold out and seats remain
available, it is nonrival.
e. a pleasant, sunny afternoon
The pleasant afternoon is nonrival and nonexcludable and so is a public good.
f. sunset seen over Fire Island
The sunset is nonrival and nonexcludable and
so is a public good.
g. shrimp eaten at a tailgate party
The shrimp are rival and excludable and so are
a private good.
■ Self Test 10.1
Fill in the blanks
A good is ____ (rival; nonrival; excludable) if it
is possible to prevent someone from enjoying
its benefits. A good is ____ (rival; nonrival; excludable) if its use by one person does not decrease the quantity available for someone else.
A good that is nonrival and nonexcludable is a
____ (private; public; common) good and a
good that is rival and excludable is a ____ (private; public; common) good. A common resource is ____ (rival; nonrival) and ____ (excludable; nonexcludable).
True or false
1. A good is nonexcludable if it is impossible
to prevent someone from benefiting from it.
2. A private good is nonrival and nonexcludable.
3. A taco from Taco Bell is a public good.
4. A common resource is nonrival and excludable.
5. Fish in the ocean are rival and nonexcludable.
Multiple choice
1. The fact that Heidi’s enjoyment of a sunset
on Saint Simon’s Island does not preclude
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Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY
Mounette from enjoying the same sunset is
an example of
a. a good that is nonrival.
b. a good that is excludable.
c. a private good.
d. the rival nature of consumption.
8. Which of the following is the best example
of a common resource?
a. national defense
b. a Ford Thunderbird
c. Yosemite national park
d. a Mountain Dew
2. When use of a good decreases the quantity
available for someone else, the good is
a. rival.
b. nonrival.
c. excludable.
d. nonexcludable
Short answer and numeric questions
1. What does it mean for a good to be nonexcludable? Nonrival?
2. Goods can be excludable or nonexcludable,
rival or nonrival. Using these criteria, what
is a public good, a private good, and a
common resource?
3. A private good is ____ and ____.
a. rival; excludable
b. rival; nonexcludable
c. nonrival; excludable
d. nonrival; nonexcludable
4. If I order a pizza and invite my neighbors to
eat it, the pizza is
a. a private good.
b. a common resource.
c. a public good because many people ate it.
d. either a common resource or a public
good depending on whether it is overused or not.
5. A public good is ____ and ____.
a. rival; excludable
b. rival; nonexcludable
c. nonrival; excludable
d. nonrival; nonexcludable
6. A public good
a. can only be consumed by one person at a
time.
b. can be consumed simultaneously by everyone.
c. is any good provided by a company
owned by a member of the public.
d. is any good provided by government.
7. Which of the following is the best example
of a public good?
a. national defense
b. a Ford Thunderbird
c. Yosemite national park
d. a Mountain Dew
CHECKPOINT 10.2
■ Explain the free-rider problem and
how public provision can help to
overcome that problem.
Practice Problems 10.2
1. For each of the following goods, explain
whether there is a free-rider problem. If there is
no such problem, how is it avoided?
a. Measles vaccination
b. Fire protection
c. July 4th fireworks display
d. Interstate 80 in rural Wyoming
2. The table proQuantity Marginal Marginal
vides informa- (square
cost
benefit
tion about a miles per (dollars
(dollars
mosquito conday)
per day) per day)
trol program.
0
0
0
a. What quan1
1,000
5,000
2
2,000
4,000
tity
of
3
3,000
3,000
spraying
4
4,000
2,000
would
a
5
5,000
1,000
private
mosquito control program provide?
b. What is the efficient quantity of spraying?
c. In a single-issue election on the quantity
of spraying, what quantity would the
winner of the election provide?
Chapter 10 . Public Goods and Common Resources
Solution to Practice Problems 10.1
The first Practice Problem provides practice
recognizing the free-rider problem. The second
Practice Problem examines free riding and the
efficient amount of a public good.
Quick Review
• Free rider A free rider enjoys the benefits
of a good or service without paying for
the good or service.
1. For each of the following goods, explain
whether there is a free-rider problem. If there
is no such problem, how is it avoided?
1a. Measles vaccination
Measles vaccinations are a public good because
the benefits are nonexcludable: Children who
are not vaccinated benefit from those who are
because the non-vaccinated children have a
smaller chance of catching the measles. The
free-rider problem is avoided by requiring children be vaccinated in order to attend school.
1b. Fire protection
Fire protection is a public good. People attempt
to be free riders but public provision paid
through taxes prevents the free-rider problem.
1c. July 4th fireworks display
The fireworks display is nonrival, nonexcludable, and a public good. People attempt to free
ride, but public provision paid through taxes
prevents the free-rider problem.
1d. Interstate 80 in rural Wyoming
The highway is nonrival, nonexcludable, and a
public good. Individuals will free ride, though
free riding is limited to an extent because users
pay vehicle registration fees. They also pay
gasoline taxes in proportion to their use of the
roadways.
2. The table provides information about a mosquito control program.
2a. What quantity of spraying would a private mosquito program provide?
A private mosquito control program would
provide no spraying because too many people
would try to free ride by not paying for the
spraying. After all, if the neighbor pays and you
do not, spraying the neighbor’s place likely kills
149
your mosquitoes, too, so no one has the incentive to pay for the spraying.
2b. What is the efficient quantity of spraying?
The efficient quantity is to spray three miles per
day, because that is the quantity at which the
marginal benefit equals the marginal cost.
2c. In a single-issue election on the quantity
of spraying, what quantity would the
winner of the election provide?
Voters want the efficient quantity of mosquito
spraying, three miles, and so each political
party is led to propose three miles of spraying
in order to gain votes. Hence in this sort of election, the outcome is the efficient quantity of
spraying.
Additional Practice Problem 10.2a
How do rational ignorance and bureaucrats’
goal of budget maximization combine to lead to
inefficient overprovision of public goods?
Solution to Additional Practice Problem 10.2a
If voters knew the marginal social benefit and
marginal social cost of a public good, they
could elect politicians who would deliver the
efficient quantity. But voters generally are rationally ignorant about the marginal social
benefit and marginal social cost of most public
goods. So bureaucrats, who want to increase
their budget, and special interest groups, such
as the producers of a public good, lobby politicians to provide more than the efficient amount
of public goods. Politicians accede to the lobbying because they know that (rationally ignorant) voters will not realize that too much of the
public good is provided.
■ Self Test 10.2
Fill in the blanks
A person who enjoys the benefit of a good or
service without paying for it is a ____. The marginal benefit curve for a public good is the ____
(horizontal; vertical) sum of the individual
marginal benefit curves. The efficient quantity
of a public good is the quantity at which the
marginal benefit ____ the marginal cost. ____
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Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY
(Rational ignorance; The principle of minimum
differentiation) is the decision to not acquire information because the marginal cost of doing so
exceeds the expected marginal benefit. Bureaucrats try to ____ (maximize; minimize) their
budgets.
True or false
1. Beth is a free rider when she is protected by
the nation’s military but does not pay anything for the protection.
2. The marginal benefit curve for a public
good slopes downward.
3. The efficient quantity of a public good is the
quantity at which marginal benefit equals
marginal cost.
4. A private firm would produce too much of a
public good.
5. Rational ignorance can lead to the provision
of more than the efficient amount of a public
good.
Multiple choice
1. When someone enjoys the benefit of a good
or service but does not pay for it, that person
a. is a free range consumer.
b. is a free rider.
c. receives no marginal benefit from the
good.
d. must be consuming an excludable good.
2. The marginal benefit of a public good is the
a. sum of the marginal benefits of all the individuals at each quantity.
b. marginal benefit of the individual person
who places the lowest value on the good,
multiplied by the number of people in
the economy.
c. marginal benefit of the individual person
who places the highest value on the good,
multiplied by the number of people in
the economy.
d. benefit of the last person’s consumption.
3. The marginal benefit curve of a public good
a. slopes downward.
b. slopes upward.
c. is vertical.
d. is horizontal.
4. The efficient quantity of a public good is
a. the quantity produced by private firms.
b. the quantity at which the marginal benefit equals the marginal cost.
c. impossible to determine because each
person’s marginal benefit is different.
d. the quantity at which the marginal benefit exceeds the marginal cost by as much
as possible.
5. The efficient quantity of a public good can’t
be produced by private firms because
a. only government has the necessary resources.
b. it is impossible to determine the efficient
amount.
c. consumers have an incentive to free ride
and not pay for their share of the good.
d. private firms aren’t large enough.
6. If the two political parties propose similar or
identical policies, they are following the
principle of
a. rational ignorance.
b. inefficient overprovision.
c. free riding.
d. minimum differentiation.
7. ____ is the decision not to acquire information because the marginal cost of doing so
exceeds expected marginal benefit.
a. Rational ignorance
b. The principle of minimum differentiation
c. A free rider
d. Consumer ignorance
Chapter 10 . Public Goods and Common Resources
8. Government bureaucracies over-provide
public goods and grow larger because of
their goal of ____ combined with ____ of the
voters.
a. budget maximization; rational ignorance
b. budget minimization; irrational intelligence
c. budget maximization; minimum differentiation
d. budget maximization; irrational exuberance
Complete the graph
1. Three shipping firms serve the west coast of
a nation. The table has the firms’ marginal
benefit schedules for lighthouses. Lighthouses are a public good and the marginal
cost of constructing a lighthouse is constant
at $120,000.
Quantity
(lighthouses)
1
2
3
4
Marginal
benefit,
Firm A
(dollars)
50,000
45,000
40,000
35,000
Marginal
benefit,
Firm B
(dollars)
50,000
45,000
40,000
35,000
Marginal
benefit,
Firm C
(dollars)
50,000
45,000
40,000
35,000
a. Complete the table below. Then graph the
economy’s marginal benefit and marginal
cost curves in Figure 10.1.
Quantity
(lighthouses)
1
2
3
4
Marginal benefit,
(dollars per lighthouse)
b. What is the efficient number of lighthouses to build?
c. If all three firms agree to split the cost of
building lighthouses equally, how much
would each firm pay per lighthouse and
how many lighthouses will be built?
d. Suppose that one firm decides to free ride
and not pay for the construction of any
lighthouses. How much would each of the
two other firms pay per lighthouse and
how many lighthouses will be built?
151
FIGURE 10.1
0
e. In the situation described in part (d), how
might government action overcome the
problem?
Short answer and numeric questions
1. What is a free rider? Why is free riding not a
problem for private goods?
2. A very small (!) nation has 10 citizens. Each
resident has a $10 marginal benefit from 1
unit of a private good. In addition, each has
a $10 marginal benefit from 1 unit of a public good. What is one combination of marginal benefit and quantity on the economy’s
marginal benefit curve for the private good
and what is one combination on the economy’s marginal benefit curve for the public
good? Explain the difference.
3. How does free riding affect the private provision of a public good? How does rational
ignorance affect the public provision of a
public good?
CHECKPOINT 10.3
■ Explain the problem of the
commons and review the possible
solutions to that problem.
Practice Problem 10.3
In an English village in 1375, cows graze on
common pasture and can produce milk in the
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Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY
amounts shown in
Milk output
the
table.
The Number of (gallons per
cows
day)
marginal private cost
100
300
of a cow is zero.
200
500
a. What is the
300
600
marginal private
400
600
benefit at each
500
500
quantity
of
600
300
cows?
700
0
b. What is the
equilibrium number of cows?
c. What is the marginal social benefit at each
quantity of cows?
d. What are the efficient number of cows and
quantity of milk to produce?
e. If the common pasture was converted to
private land and fenced off, how many
cows would the landowner keep?
f. If the ITQs were issued for the efficient
quantity of milk production, what would
be the market price of an ITQ?
Solution to Practice Problem 10.3
This Practice Problem gives you practice in determining the difference between the marginal
private benefit and the marginal social benefit
for a common resource. It also tackles policies
that lead to an efficient use of common resources.
Quick Review
• Problem of the commons The absence of incentives to prevent the overuse and depletion of a commonly owned resource.
• Marginal private benefit The benefit received by an individual from using a
common resource.
• Marginal social benefit The benefit received by society when an individual
uses a common resource.
a. What is the marginal private benefit at
each quantity of cows?
The table in the next column shows the marginal private benefit schedule. The marginal
private benefit is the average amount of milk
that one cow can produce in a day. At 100 cows,
the marginal private benefit equals 300 gallons
÷ 100 cows, which is 3 gallons a cow.
Number of
cows
Marginal
Marginal
Milk output private benefit social benefit
(gallons per (gallons per
(gallons per
day)
cow)
cow)
0
0
100
300
3.0
200
500
2.5
300
600
2.0
400
600
1.5
500
500
1.0
600
300
0.5
700
0
0.0
3.0
2.0
1.0
0.0
−1.0
−2.0
−3.0
b. What is the equilibrium number of cows?
The equilibrium occurs when marginal private
benefit equals marginal cost. The marginal cost
is zero, so the equilibrium number of cows is
700 and no milk is produced.
c. What is the marginal social benefit at
each quantity of cows?
The table above shows the marginal social
benefit schedule. The marginal social benefit is
the change in the quantity of milk that results
from an additional cow. An increase in the
number of cows from 100 cows to 200 cows, an
increase of 100 cows increases the quantity of
milk from 300 gallons to 500 gallons, an increase of 200 gallons. Marginal social benefit is
equal to 200 gallons ÷ 100 cows, which is 2 gallons a cow.
d. What are the efficient number of cows
and quantity of milk to produce?
The efficient number of cows occurs when marginal social benefit equals marginal cost. The
marginal cost is zero. The marginal social benefit equals zero at a quantity of 350 cows, midway between 300 and 400 cows in the table. The
efficient quantity of cows is 350 and they produce a bit more than 600 gallons a day.
e. If the common pasture was converted to
private land and fenced off, how many
cows would the landowner keep?
If the common pasture was converted to private
land, the marginal private benefit becomes
Chapter 10 . Public Goods and Common Resources
equal to the marginal social benefit because the
owner’s benefit from more cows is the change
in milk production. The landowner would keep
350 cows. 350 cows is the quantity that maximizes output.
f. If the ITQs were issued for the efficient
quantity of milk production, what would
be the market price of an ITQ?
The market price of an ITQ equals the marginal
private benefit at the efficient quantity of cows
minus the marginal cost. The efficient quantity
of cows is 350 and the marginal private benefit
at 350 cows is 1.75 gallons (midway between
the marginal private benefit of 300 cows and of
400 cows). The marginal cost is 0, so the market
price of an ITQ is 1.75 gallons.
Additional Practice Problem 10.3a
For a common resource, why is the marginal
social benefit less than the marginal private
benefit?
Solution to Additional Practice Problem 10.2a
The marginal private benefit measures only the
benefit going to an individual from his or her
use of a common resource. But when someone
uses a common resource, he or she decreases
the benefit going to other users. The marginal
social cost takes account of this decrease. The
marginal social benefit is the marginal private
benefit minus the decrease to other users, so the
marginal social benefit from a common resource is less than the marginal private benefit.
■ Self Test 10.3
Fill in the blanks
The problem of the commons is the absence of
incentives to prevent the ____ (overuse; under
use) of a commonly owned resource. The marginal private benefit of an additional fishing
boat is the ____ (increase in the total fish catch;
quantity of fish that one boat can catch). The
marginal social benefit of an additional fishing
boat is the ____ (increase in the total fish catch;
quantity of fish that one boat can catch). The
marginal private benefit curve for a common
resource lies ____ (above; below) the marginal
social benefit curve. To use a common resource
153
efficiently, establishing property rights ____ (is;
is not) a potential solution. The price of an individual transferable quota equals the marginal
____ (private; social) benefit of the resource at
the efficient quantity ____ (plus; minus) the
marginal cost of using the resource.
True or false
1. The problem of the commons is the absence
of incentives that prevent the overuse and
depletion of a commonly owned resource.
2. The marginal benefit curve of a common resource slopes upward.
3. The efficient use of a common resource occurs when the marginal private benefit
equals the marginal cost.
4. At the efficient level of use, the marginal
private benefit of a common resource exceeds the marginal social benefit.
5. Property rights and quotas are potential solutions to the problem of the commons.
Multiple choice
1. The problem of the commons is the absence
of incentives to
a. correctly measure the marginal cost.
b. prevent under use of the common resource.
c. prevent overuse and depletion of the
common resource.
d. discover the resource.
2. For a common resource such as fish, the
marginal private benefit of an additional
boat is the ____ and the marginal social
benefit is the ____.
a. catch per boat; quantity of fish that one
boat can catch
b. quantity of fish that one boat can catch;
change in the total catch from an additional boat
c. change in the total catch from an additional boat; catch per boat
d. catch per boat; change in the total catch
from an additional boat
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Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY
3. For a common resource, the equilibrium
with no government intervention is such
that ____ equals ____.
a. marginal private benefit; marginal cost
b. marginal social benefit; marginal cost
c. marginal private benefit; marginal social
benefit
d. social benefit; cost
Complete the graph
1. Figure 10.2 shows the marginal cost, marginal private benefit, and marginal social
benefit curves for swordfish, a common resource. Label each curve.
4. For a common resource, the marginal private benefit of the resource is ____ the marginal social benefit.
a. greater than
b. equal to
c. less than
d. not comparable to
100
5. For a common resource, the marginal private benefit curve slopes ____ and the marginal social benefit curve slopes ____.
a. upward; upward
b. upward; downward
c. downward; upward
d. downward; downward
20
6. For a common resource, efficiency requires
that the ____ equals the ____.
a. marginal private benefit; marginal cost
b. marginal social benefit; marginal cost
c. marginal private benefit; marginal social
benefit
d. marginal social cost; marginal cost
7. If the government assigns private property
rights to a common resource, then the
a. resource is under-utilized.
b. marginal private benefit becomes equal
to the marginal social benefit.
c. government needs to set a quota to
achieve efficiency.
d. None of the above answers is correct.
8. The market price of an individual transferable quota is equal to the
a. marginal private benefit.
b. marginal social benefit.
c. marginal private benefit minus the marginal cost.
d. marginal social benefit minus the marginal cost.
F I G U R E 10.2
Sustainable catch per boat (tons per month)
80
60
40
0
1
2
3
4
5
6
Boats (hundreds)
a. What is the equilibrium number of boats
and sustainable catch? What is the efficient number of boats and sustainable
catch?
b. If the government sets a quota, what
quota achieves the efficient outcome?
c. If the government issues individual transferable quotas (ITQ), what is the market
price of an ITQ?
Short answer and numeric questions
1. What is the problem of the commons and
why does it occur? Give an example of how
the problem of the commons affects the
world’s fisheries.
2. For a common resource, why does the marginal private benefit not equal the marginal
social benefit? Which is smaller?
Chapter 10 . Public Goods and Common Resources
Marginal
Marginal
Meat
private benefit social benefit
Number of (pounds per (pounds per (pounds per
sheep
year)
year)
year)
0
0
10
2,000
____
150
20
3,000
____
50
30
3,000
____
−50
40
2,000
____
−150
50
0
____
3. The table gives the quantity of meat per
year and marginal social benefit of grazing
sheep on a common pasture. The marginal
cost of raising a sheep is 50 pounds of meat
per year.
a. Complete the table by calculating the marginal private benefit.
b. In Figure 10.3, plot the marginal cost curve,
the marginal private benefit curve, and the
marginal social cost curve.
c. What is the equilibrium number of sheep
and the equilibrium quantity of meat?
d. What is the efficient number of sheep and
the efficient quantity of meat?
e. If the government issues the efficient quantity of individual transfer quotas (ITQ), each
of which allows 1 sheep to be grazed on the
pasture, how many ITQs does the government issue and what is the market price of
an ITQ?
155
F I G U R E 10.3
Meat output (pounds per year)
250
150
50
0
-50
-150
0
10
20
30
40
50
60
Sheep (number)
156
Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY
SELF TEST ANSWERS
■ CHECKPOINT 10.1
Fill in the blanks
A good is excludable if it is possible to prevent
someone from enjoying its benefits. A good is
nonrival if its use by one person does not decrease the quantity available for someone else.
A good that is nonrival and nonexcludable is a
public good and a good that is rival and excludable is a private good. A common resource
is rival and nonexcludable.
True or false
1. True; page 232
2. False; page 232
3. False; page 232
4. False; page 233
5. True; page 233
Multiple choice
1. a; page 232
2. a; page 232
3. a; page 232
4. a; page 232
5. d; page 233
6. b; page 233
7. a; page 233
8. c; page 233
Short answer and numeric questions
1. A good is nonexcludable if it is impossible
(or extremely costly) to prevent someone
from benefiting from it. For example, the national defense provided by a fighter plane
benefits everyone. A good is nonrival if its
use by one person does not decrease the
quantity available for someone else. For example, the national defense provided by a
fighter plane to you does not decrease the
amount of defense it provides to your
neighbor; page 232.
2. A public good is a good that is nonrival and
nonexcludable. A private good is a good
that is rival and excludable. A common re-
source is a resource that is rival and nonexcludable; pages 232-233.
■ CHECKPOINT 10.2
Fill in the blanks
A person who enjoys the benefit of a good or
service without paying for it is a free rider. The
marginal benefit curve for a public good is the
vertical sum of the individual marginal benefit
curves. The efficient quantity of a public good is
the quantity at which the marginal benefit
equals the marginal cost. Rational ignorance is
the decision to not acquire information because
the marginal cost of doing so exceeds the expected marginal benefit. Bureaucrats try to
maximize their budgets.
True or false
1. True; page 235
2. True; page 237
3. True; page 238
4. False; page 238
5. True; page 242
Multiple choice
1. b; page 235
2. a; pages 236-237
3. a; page 237
4. b; page 238
5. c; page 238
6. d; page 240
7. a; page 241
8. a; page 242
Complete the graph
Quantity
Economy’s marginal benefit
(lighthouses)
(dollars)
1
150,000
2
135,000
3
120,000
4
105,000
1. a. The complete table is above and the completed figure is Figure 10.4 on the next
page; pages 236-237.
Chapter 10 . Public Goods and Common Resources
FIGURE 10.4
Marginal benefit (thousands of dollars per lighthouse)
165
150
135
120
MC
105
0
MB
1
2
3
4
5
Quantity (number of lighthouses)
b. The efficient number of lighthouses to
build is 3; page 238.
c. Each firm pays $40,000 per lighthouse and
three lighthouses are built; page 238.
d. If one firm free rides, the other firms
would need to pay $60,000 a lighthouse.
No lighthouses would be built because
$60,000 exceeds each firm’s marginal
benefit from any lighthouse; page 238.
e. The government could tax each firm
$40,000 per lighthouse and use the tax
revenue to build three lighthouses; page
239.
Short answer and numeric questions
1. A free rider is a person who enjoys the benefits of a good or service without paying for
it. Free riding is not a problem for private
goods because private goods are excludable;
page 235.
2. For the private good, one combination on
the economy’s marginal benefit curve is: $10
marginal benefit and 10 units. For the public
good, one combination is: $100 marginal
benefit and 1 unit. The difference occurs because for the rival private good, all residents
need their own unit of the good in order to
consume it, whereas for the nonrival public
good, each citizen will consume the same
unit. So to obtain the economy’s marginal
benefit curve for a private good, we sum the
quantities demanded at each price. To ob-
157
tain the economy’s marginal benefit curve
for a public good, we sum the marginal
benefits of all individuals at each quantity;
pages 236-237.
3. Because everyone can consume the same
quantity of a public good and no one can be
excluded from enjoying its benefits, no one
has an incentive to pay for it. Everyone has
an incentive to free ride. Because of the freerider problem, the market would provide
too small a quantity of a public good.
Bureaucrats who maximize their budgets
and voters who work in the industry exert a
larger influence on public policy than voters
who are rationally ignorant. This set of circumstances leads to overprovision; pages
238 and 242.
■ CHECKPOINT 10.3
Fill in the blanks
The problem of the commons is the absence of
incentives to prevent the overuse of a commonly owned resource. The marginal private
benefit of an additional fishing boat is the
quantity of fish that one boat can catch. The
marginal social benefit of an additional fishing
boat is the increase in the total fish catch. The
marginal private benefit curve for a common
resource lies above the marginal social benefit
curve. To use a common resource efficiently, establishing property rights is a potential solution. The price of an individual transferable
quota equals the marginal private benefit of the
resource at the efficient quantity minus the
marginal cost of using the resource.
True or false
1. True; page 244
2. False; page 246
3. False; page 246
4. True; page 246
5. True; page 248
Multiple choice
1. c; page 244
2. b; pages 245-246
Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY
158
3.
4.
5.
6.
7.
8.
a;
a;
d;
b;
b;
c;
private benefit minus the marginal cost at
the quota level of fish. The government issues ITQs to 200 boats and so the market
price of an ITQ is 60 tons a month, the
marginal private benefit, minus 20 tons a
month, the marginal cost, which equals a
market price of 40 tons a month; page 249.
page 245
pages 246
page 246
page 246
page 248
page 249
Complete the graph
1. Figure 10.5 labels the curves.; page 247.
F I G U R E 10.5
Sustainable catch per boat (tons per month)
100
80
60
40
20
MC
MSB
0
1
2
MPB
3
4
5
6
Boats (hundreds)
a. The equilibrium number of boats is determined by the intersection of the marginal cost curve and the marginal private
benefit curve, so the equilibrium number
of boats is 400 and the sustainable catch is
20 tons of swordfish a month. The efficient
number of boats is determined by the intersection of the marginal cost curve and
the marginal social benefit curve, so the efficient number of boats is 200 and the sustainable catch is 60 tons of swordfish a
month from the marginal social benefit
curve; pages 245, 247.
b. If the government sets the quota at the efficient quantity, the quota for total production is set at the quantity at which
marginal social benefit equals marginal
cost. Here, that quantity is what 2,000
boats can produce; page 248.
c. The market price of an individual transferable quota (ITQ) equals the marginal
Short answer and numeric questions
1. The problem of the commons is that there is
no incentive to prevent the overuse and depletion of a commonly used resource. As
more boats fish, the quantity of fish that one
boat can catch decreases. But no individual
takes account of the decrease in the average
catch because each person is concerned
about what he or she catches As a result,
additional boats continue to fish until their
marginal private benefit equals the marginal
cost of fishing. Each boat considers only its
marginal private benefit. With this many
boats fishing, marginal cost is greater than
marginal social benefit and the fish stock is
depleted; pages 244-245.
2. The marginal private benefit of using a
common resource does not equal the marginal social benefit because the marginal
private benefit does not take account of the
effect that using the resource has on others.
As a common resource is used more intensively, each additional person’s use decreases everyone else’s benefit from the resource. But the marginal private benefit ignores the decrease in other people’s benefit.
The marginal social benefit takes account of
both the added benefit to the new user (the
marginal private benefit) and the decrease in
everyone else’s benefit. So the marginal social benefit is less than the marginal private
benefit; pages 245-246.
Chapter 10 . Public Goods and Common Resources
Marginal
Marginal
Meat
private benefit social benefit
Number of (pounds per (pounds per (pounds per
sheep
year)
year)
year)
0
0
10
2,000
200
150
20
3,000
150
50
30
3,000
100
−50
40
2,000
50
−150
50
0
0
3. a. The completed table is above. The marginal private benefit of a sheep is the
quantity of meat per sheep. For 10 sheep
the marginal private benefit is 2,000
pounds ÷ 10 sheep, which is 200 pounds;
page 245.
b. Figure 10.6 shows the marginal cost curve,
the marginal private benefit curve, and the
marginal social benefit curve; pages 245,
247.
c. The equilibrium number of sheep is determined by the intersection of the marginal private benefit curve and the marginal cost curve. The equilibrium number
of sheep is 40 sheep. The equilibrium
quantity of meat with 40 sheep is 2,000
pounds a year; page 245.
d The efficient number of sheep is determined by the intersection of the marginal
social benefit curve and the marginal cost
curve. The equilibrium number of sheep is
20 sheep. The equilibrium quantity of
meat with 20 sheep is 3,000 pounds a year;
page 247.
e. The government issues 20 ITQs because 20
sheep is the efficient number of sheep. The
market price of an ITQ is the marginal
private benefit at the quantity of ITQs issued minus the marginal cost. The marginal private benefit with 20 ITQs is 150
pounds of meat a year. The marginal cost
is 50 pounds of meat a year. So the market
price of an ITQ is 150 pounds of meat − 50
pounds of meat, which is 100 pounds of
meat a year; page 249.
159
F I G U R E 10.6
Meat output (pounds per year)
250
150
50
0
-50
MC
MPB
-150
MSB
0
10
20
30
40
50
60
Sheep (number)
160