Transcript Characteristics of goods -

Externalities and Market Failure
Let’s just rely on the free market to
solve environmental problems…right?
Setup & Motivation
• What makes an environmental issue an
“environmental problem?”
– When one party’s actions affect another party without
compensation.
• Think of the physical “stuff” that makes up the
environment as “goods” and “bads”
– Goods: clean air, fuzzy critters, safe water
– Bads: NOx, CO2, oil slicks, harm to species
• A large part of economics is to classify and
design/inform regulation of goods and bads.
– Characteristics of goods/bads drives policy design
Characteristics of goods -- I
• Excludability: A good/bad is excludable if
it is feasible and practical to selectively
allow consumption of the good
– Examples (excludable?)
• Harvest of a particular fish
• Hamburger
• Air pollution in LA
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Characteristics of goods -- II
• Rivalry: A good/bad is rival if one person’s
consumption reduces amount available to others
(holding supply fixed)
– Examples (rival?)
• A particular fish
• Hamburger
• Space on an uncongested freeway
• A nonrival good can be simultaneously consumed
by many people
• Nonrival goods can become congested
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Characteristics of goods -- III
• Externalities: An externality exists when
one person or firm controls something I
consume or that affects my consumption
(or well-being)
– Smoke
– Snowmobiling in Yellowstone
– Biodiversity loss
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Importance of rivalry and excludability
• Excludability – necessary for price system to
be used…why?
• Rivalry – necessary for efficiency of price
system….why?
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Importance of rivalry and excludability
• Excludability – necessary for price system to
be used…why?
– If cannot exclude, nobody will pay
• Rivalry – necessary for efficiency of price
system….why?
– If non-rival, people will free-ride
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A taxonomy
Rival
Excludable
Nonexcludable
Nonrival
Private Goods
Club Goods
Open Access Resources
Pure Public Goods
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Examples
Rival
Goods: Bratwurst
Excludable
Nonexcludable
Bads: Household garbage
in 2010
Goods: A fish in an OA
fishery
Bads: Household garbage
in Middle Ages
Nonrival
Goods: Local public beach
with access control
Bads: Water pollution in
small lake
Goods: National Defense
or Global Climate
Bads: Greenhouse gases
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Examples
Markets work fine
Rival
Goods: Bratwurst
Excludable
Bads: Household garbage
today
Goods: Fishery
Nonexcludable
Bads: Household garbage
in Middle Ages
Nonrival
Goods: Local public beach
with access control
Bads: Water pollution in
small lake
Goods: National Defense
or Global Climate
Bads: Greenhouse gases
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Examples
Markets work but poorly
Rival
Goods: Bratwurst
Excludable
Bads: Household garbage
today
Goods: Fishery
Nonexcludable
Bads: Household garbage
in Middle Ages
Nonrival
Goods: Local public beach
with access control
Bads: Water pollution in
small lake
Goods: National Defense
or Global Climate
Bads: Greenhouse gases
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Examples
Markets don’t work
Rival
Goods: Bratwurst
Excludable
Bads: Household garbage
today
Goods: Fishery
Nonexcludable
Bads: Household garbage
in Middle Ages
Nonrival
Goods: Local public beach
with access control
Bads: Water pollution in
small lake
Goods: National Defense
or Global Climate
Bads: Greenhouse gases
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More examples
• Rival? Excludable?
–
–
–
–
Prairie before invention of barbed wire
Litter before anti-littering laws
Municipal garbage
Fisheries subject to ITQs
• An important finding:
– Excludability can be changed with technology
– Rivalry a fundamental characteristic
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Why important?
• Important for diagnosing problems
– If we can rely on markets, it is much easier
– If we know the market cannot work, we should
expect things to need fixing
• Important for fixing problems
– If we can use technology to make an open access
resource excludable, we know we can fix
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