Public Goods and Common Resources

1. 11 Public Goods and CommonResources

2. The Different Kinds of Goods • Two criteria for classifying different kinds of goods • Excludability • Can a person can be prevented from using it? • Yes – Private Good (PMB=SMB, no externality) • No – Public Good or Common Property/Resource • Externality (either SMB > PMB or PMC < SMC) 2. Rivalry in consumption • Does one person’s use diminishes other people’s use? • Yes – Private Good • No – Public Good or Common Property

3. 1 Four types of goods Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one person’s use of the good diminishes other people’s use of it. This diagram gives examples of goods in each category.

4. The Different Kinds of Goods • Types of goods • Public goods • Not excludable & Not rival in consumption • Common resources • Rival in consumption & Not excludable • Private goods • Excludable & Rival in consumption • Natural monopoly • Excludable & Not rival in consumption

5. The Different Kinds of Goods • Public goods & Common resources • Not excludable: people cannot be prevented from using them (free riders) • Externalities • Public Good: positive externality/benefits for the public, but not compensated for in market • SMB > PMB -> 2 different demand curves • Produce too little when PMB = PMC (Market) • Common property resource: negative externality/costs • PMC < SMC -> 2 different cost curves • Overuse of the resource

6. Public Goods • The free-rider problem (can’t exclude) Free rider = not excludable • Person who receives the benefit of a good but avoids paying for it • Public goods = can’t get everyone to pay for benefits derived (e.g., fire protection) • Free-rider prevents the private market from supplying the economically efficient as SMB > PMB but people only pay for PMB • Common Property • Others use of the property degrades productivity -> imposing costs on others (SMC > PMC)

7. Public Goods • The free-rider problem • Government - can remedy the problem • If total benefits > costs of a public good, then: • Provide the public good (or subsidize it) • Pay for it with tax revenue • Makes everyone better off

8. Public Goods • Some important public goods • National defense • Very expensive public good • Basic research • General knowledge • Fighting poverty • Welfare system • Food stamps • Education

9. Are lighthouses public goods? • Lighthouses (an older example) • Mark specific locations so that passing ships can avoid treacherous waters • Benefit - to the ship captain • Not excludable, not rival in consumption • Incentive – free ride without paying • Most - operated by the government • In some cases • Lighthouses - closer to private goods • Coast of England, 19th century • Lighthouses – privately owned and operated • The owner - charged the owner of the nearby port

10. Are lighthouses public goods? • Decide whether something is a public good • Determine who the beneficiaries are • Determine whether the beneficiaries can be excluded from using the good • A free-rider problem • When the number of beneficiaries is large • Exclusion of any one of them is impossible

11. Public Goods • The difficult job of cost–benefit analysis • Government • Decide what public goods to provide • In what quantities • Cost–benefit analysis • Compare the costs and benefits to society of providing a public good • Doesn’t have any price signals to observe • See Harris • Government findings on the costs and benefits • Rough approximations at best

12. How much is a life worth? • Cost: $10,000 – new traffic light • Benefit: increased safety • Risk of a fatal traffic accident • Drops from 1.6% to 1.1 % • Obstacle • Measure costs and benefits in the same units • Put a dollar value on a human life • Priceless = infinite dollar value

13. How much is a life worth? • Put a dollar value on a human life • Implicit dollar value • Courts - award damages in wrongful-death suits • Ignores other opportunity costs of losing one’s life • Occupational Risks - people are voluntarily willing to take • Value of human life = $10 million • Cost-benefit analysis • Traffic light • Reduces risk of fatality by 0.5 percentage points • Expected benefit = 0.005 × $10 million = $50,000 • Cost ($10,000) < Benefit ($50,000) • Approve the traffic light

14. Common Resources • Common resources • Not excludable • Rival in consumption • The tragedy of the commons • why are common resources used more than is desirable • Social and private incentives differ • Arises because of a negative externality • Don’t take into account costs imposed on others when equating PMB and PMC

15. Common Resources • The tragedy of the commons • Negative externality • One person uses a common resource • Diminishes other people’s enjoyment of it • Common resources tend to be”overused” • Government - can solve the problem • Regulation or taxes • Reduce consumption of the common resource • Turn the common resource into a private good • Tradable permits (Individually Transferable Quotas)

16. Common Resources • Some important common resources • Clean air and water • Congested roads • Fish, whales, and other wildlife

17. Why the cow is not extinct • Species of animals • Public Goods • Have a commercial value - threatened with extinction • Buffalo • North America • Hunting to near extinction - 19th century (from trains) • Elephants (Ivory) • African countries • Hunting – today • Private good • The cow • Commercial value • Species - continue to thrive

18. Why the cow is not extinct • Elephant - common resource • No owners • Poachers - numerous • Strong incentive to kill them • Slight incentive to preserve them • Cows - private good • Ranches - privately owned • Ranchers • Great effort to maintain the cattle population on his ranch • Reaps the benefit

19. Why the cow is not extinct • Government intervention – help elephant population • Kenya, Tanzania, and Uganda (CAC solution) • Illegal to kill elephants; Illegal to sell ivory • Hard to enforce • Elephant population – still diminishing • Botswana, Malawi, Namibia, and Zimbabwe • Elephants – private good • Allow people to kill elephants • Only those on their own property • Landowners - incentive to preserve elephants • Elephant population – started to rise