Public Goods & Resources (11)Mr. Barnett

AP Microeconomics

University High School

Introduction

We consume many goods without paying: parks, national defense, clean air & water.

When goods have no prices, the market forces that normally allocate resources are absent.

The private market may fail to provide the socially efficient quantity of such goods.

One of the Ten Principles from Chapter 1: Governments can sometimes improve market outcomes.

Private vs Public

A good is excludable if a person can be prevented from using it.

Excludable: fish tacos, wireless Internet access

Not excludable: FM radio signals, national defense

A good is rival in consumption if one person’s use of it diminishes others’ use.

Rival: fish tacos

Not rival: An MP3 file of Kanye West’s latest single

Private vs Public

Pure public goods are nonrival, nonexcludable, and nondivisible

Free-Riders

Since non-excludable, people enjoy good without payment

Private market produces less of the good or service than is socially optimal (buyers collectively value the good higher than the cost of providing it).

Four Classifications

Private – Rival & Excludable

Common Resources – Rival but NOT Excludable

Quasi-Public/Collective/Club Goods – NOT Rival & Excludable

Public Goods – NOT Rival & NOT Excludable

Question

A road is which of the four kinds of goods?

Hint: The answer depends on whether the road is congested or not, and whether it’s a toll road or not. Consider the different cases.

Answer

Rival in consumption? Only if congested.

Excludable? Only if a toll road.

Four possibilities:

Uncongested non-toll road: public good

Uncongested toll road: club / quasi-public/collective good

Congested non-toll road: common resource

Congested toll road: private good

Cost-Benefit Analysis

The difficult job of cost–benefit analysis

Government

Decide what public goods to provide

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

Government findings

Rough approximations at best

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

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How much is a life worth?

Implicit dollar value of a human life

Courts - award damages in wrongful-death suits

Total amount of money a person would have earned if he or she had lived

Ignores other opportunity costs of losing one’s life

Risks that people are voluntarily willing to take and how much they must be paid for taking them

Value of human life = $10 million

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How much is a life worth?

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

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Common Resources

Like public goods, common resources are not excludable. Cannot prevent free riders from using

Little incentive for firms to provide

Role for govt: seeing that they are provided

Additional problem with common resources:rival in consumption Each person’s use reduces others’ ability

to use

Role for govt: ensuring they are not overused

The Tragedy of the Commons

A parable that illustrates why common resources get used more than is socially desirable.

Setting: medieval town where sheep graze on common land.

As the population grows, the # of sheep grows.

The amount of land is fixed, the grass begins to disappear from overgrazing.

The private incentives (using the land for free) outweigh the social incentives (using it carefully).

Result: People can no longer raise sheep.

The Tragedy of the Commons

The tragedy is due to an externality: Allowing one’s flock to graze on the common land reduces its quality for other families.

People neglect this external cost, resulting in overuse of the land.

A C T I V E L E A R N I N G 2

Policy options for common resources

What could the townspeople (or their government) have done to prevent the tragedy?

Try to think of two or three options.

A C T I V E L E A R N I N G 2

Answers

Impose a corrective tax on the use of the land to “internalize the externality.”Example: hunting & fishing licenses,

entrance fees for congested national parksRegulate use of the land (the “command-

and-control” approach).Auction off permits allowing use of the land.Divide the land, sell lots to individual

families; each family will have incentive not to overgraze its own land.

Common Resources

Some important common resources

Fish, whales, and other wildlife

Oceans – least regulated common resource

Needs international cooperation

Difficult to enforce an agreement

Fishing and hunting licenses

Limits on fishing and hunting seasons

Limits on size of fish

Limits on quantity of animals killed

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Why the cow is not extinct Animals with commercial value that are

threatened with extinction Buffalo

North America

Hunting in 19th century

Elephants

African countries

Hunting today

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Why the cow is not extinct

The cow Commercial value

Species continues to thrive

Cows - private good Ranches - privately owned

Rancher - great effort to maintain the cattle population on his ranch

Reaps the benefit

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Why the cow is not extinct Elephant - common resource

Poachers - numerous

Strong incentive to kill elephants

Government

Illegal to kill elephants and sell ivory

Hard to enforce laws

Decreasing population of elephants

Elephants – private good

People can kill elephants on their own property

Landowners - incentive to preserve the species

Elephant populations have started to rise

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Public Bads

Opposite of public goods

Non-Rival & Non-excludable

Provides disutility and dissatisfaction – reduces economic welfare when consumed

Public waste & pollution are examples

Efficiency issues

CONCLUSION

Public goods tend to be under-provided, while common resources tend to be over-consumed.

These problems arise because property rights are not well-established:

Nobody owns the air, so no one can charge polluters. Result: too much pollution.

Nobody can charge people who benefit from national defense. Result: too little defense.

The gov’t can potentially solve these problems (MARKET FAILURES) with appropriate policies.