Public Goods and Common Resources

1. 16 CHAPTER Public Goods and Common Resources

2. Classifying Goods and Resources • What is the essential difference between: • A city police department and Brinks security • Fish in the Atlantic Ocean and fish in a fish farm • A live concert and a concert on television • These and all goods and services can be classified according to whether they are excludable or nonexcludable and rival or nonrival.

3. Classifying Goods and Resources • Excludable • A good is excludableif only the people who pay for it are able to enjoy its benefits. • Brinks’s security services, East Point Seafood’s fish, and a Coldplay concert are examples. • Nonexcludable • A good is nonexcludable if everyone benefits from it regardless of whether they pay for it. • The services of the LAPD, fish in the Pacific Ocean, and a concert on network television are examples.

4. Classifying Goods and Resources • Rival • A good is rival if one person’s use of it decreases the quantity available for someone else. • A Brinks’s truck can’t deliver cash to two banks at the same time. A fish can be consumed only once. • Nonrival • A good is nonrival if one person’s use of it does not decrease the quantity available for someone else. • The services of the LAPD and a concert on network television are nonrival.

5. Classifying Goods and Resources • A Four-Fold Classification • Private Goods • A private good is both rival and excludable. • A can of Coke and a fish on East Point Seafood’s farm are examples of private goods. • Public goods • A public goodis both nonrival and nonexcludable. A public good can be consumed simultaneously by everyone, and no one can be excluded from enjoying its benefits. • National defense is the best example of a public good.

6. Classifying Goods and Resources • Common Resources • A common resourceis rival and nonexcludable. • A unit of a common resource can be used only once, but no one can be prevented from using what is available. Ocean fish are a common resource. • They are rival because a fish taken by one person isn’t available for anyone else. • They are nonexcludable because it is difficult to prevent people from catching them.

7. Classifying Goods and Resources • Natural Monopolies • In a natural monopoly, economies of scale exist over the entire range of output for which there is a demand. • A special case of natural monopoly arises when the good or service can be produced at zero marginal cost. Such a good is nonrival. If it is also excludable, it is produced by a natural monopoly. • The Internet and cable television are examples.

8. Classifying Goods and Resources • Figure 16.1 shows this four-fold classification of goods and services.

9. Classifying Goods and Resources • Two Problems • Public goods create a free-rider problem—the absence of an incentive for people to pay for what they consume. • Common resources create a problem called the tragedy of the commons—the absence of incentives to prevent the overuse and depletion of a resource.

10. Public Goods and the Free-Rider Problem • Private Provision • If a private firm tried to produce and sell a public good, almost no one would buy it. • The free-rider problem results in too little of the good being produced.

11. Public Goods and the Free-Rider Problem • Public Provision • Because the government can tax all the consumers of the public good and force everyone to pay for its provision, public provision overcomes the free-rider problem. • If two political parties compete, each is driven to propose the efficient quantity of a public good. • A party that proposes either too much or too little can be beaten by one that proposes the efficient amount because more people vote for an increase in net benefit.

12. Public Goods and the Free-Rider Problem • Rational Ignorance • Rational ignorance is the decision by a voter not to acquire information about a policy or provision of a public good because the cost of doing so exceeds the expected benefit. • For voters who consume but don’t produce a public good, it is rational to be ignorant about the costs and benefit. • For voters who produce a public good, it is rational to be well informed. • When the rationality of uninformed voters and special interest groups is taken into account, the political equilibrium results in overprovision of public goods.

13. Public Goods and the Free-Rider Problem • Two Types of Political Equilibrium • The two types of political equilibrium—efficient provision and inefficient overprovision of public goods correspond to two theories of government: • Social interest theory predicts that political equilibrium achieves efficiency because well-informed voters refuse to support inefficient policies. • Public choice theory predicts that government delivers an inefficient allocation of resources—that government failure parallels market failure.

14. Public Goods and the Free-Rider Problem • Why Government Is Large and Grows • Two possible reasons are • Voter preferences • Inefficient overprovision • Government grows because the voters’ demand for some public goods is income elastic. • Inefficient overprovision might explain the size of government but not its growth rate.

15. Public Goods and the Free-Rider Problem • Voters Strike Back • If government grows too large relative to the value voters place on public goods, there might be a voter backlash that leads politicians to propose smaller government. • Privatization is one way of coping with overgrown government and is based on distinguishing between public provision and public production of public goods.

16. Common Resources • The Tragedy of the Commons • The tragedy of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource. • Examples include the Atlantic Ocean cod stocks, South Pacific whales, and the quality of the earth’s atmosphere. • The traditional example from which the term derives is the common grazing land surrounding middle-age villages.

17. Common Resources • The Efficient Use of the Commons • The quantity of fish caught by each boat decreases as the number of boats increases. • But no one has an incentive to take this fact into account when deciding whether to fish. • The efficient use of a common resource requires marginal social cost to equal marginal social benefit.

18. Common Resources • Achieving an Efficient Outcome • It is harder to achieve an efficient use of a common resource than to define the conditions under which it occurs. • Three methods that might be used are • Property rights • Quotas • Individual transferable quotas (ITQs)

19. Common Resources • Property Rights • By assigning property rights, common property becomes private property. • When someone owns a resource, the owner is confronted with the full consequences of her/his actions in using that resources. • The social benefits become the private benefits. • But assigning property rights is not always feasible.

20. Common Resources • Quotas • By setting a production quota at the efficient quantity, a common resource might remain in common use but be used efficiently. • Figure 16.8 shows this situation. • It is hard to make a quota work.

21. Common Resources • Individual Transferable Quotas • An individual transferable quota (ITQ) is a production limit that is assigned to an individual who is free to transfer the quota to someone else. • A market in ITQs emerges. • If the efficient quantity of ITQs is assigned, the market price of an ITQ confronts resource users with a marginal cost that equals MSB at the efficient quantity.

22. Common Resources • Figure 16.9 shows the situation with an efficient number of ITQs. • The market price of an ITQ increases the marginal cost to MC1. • Users of the resource make marginal private benefit, MB, equal to marginal private cost, MC1, and the outcome is efficient.

23. Common Resources • Public Choice and Political Equilibrium • It is easy for economists to agree that ITQs make it possible to achieve an efficient use of a common resource. • It is difficult to get the political marketplace to deliver that outcome. • In 1996, Congress killed an attempt to use ITQs in the Gulf of Mexico and the Northern Pacific Ocean. • Self-interest and capture of the political process sometimes beats the social interest.