Transcript File
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
9
How much is a life worth?
Implicit dollar value of a human life
Courts - award damages in wrongfuldeath 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
10
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
11
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.
ACTIVE LEARNING
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.
ACTIVE LEARNING
Answers
2
Impose a corrective tax on the use of the
land
to “internalize the externality.”
Example: hunting & fishing licenses,
entrance fees for congested national parks
Regulate use of the land (the “command-andcontrol” 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
17
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
18
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
20
Public Bads
Opposite of public goods
Non-Rival & Nonexcludable
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.