Transcript Slide 1

Public Goods and Common-Pool Resources
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Characteristics of a Good
Excludable: the property of a good whereby a person can be prevented from
using it
Rival: the property of a good whereby one person’s use diminishes other
peoples’ use
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Classification of Goods
RIVAL
Yes
No
Yes
Private Goods
Club Goods
No
Common-Pool
Resources
Public Goods
EXCLUDABLE
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Public Goods
Non-rival and non-excludable
The Free Rider Problem: Individuals have little (or no) incentive to
pay for public goods because they can enjoy the benefits by free
riding on the payments of others
• Public goods result in market failure
• The level of provision will be inefficiently low
• Intuition follows from recognizing that provision generates a
positive externality
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Example: A Small Fireworks Display
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Assumptions
Two individuals
Identical demands for bottle rockets, Q = 4 – P
P = 2 is the price per bottle rocket
• What is the equilibrium quantity of bottle rockets?
• What is the efficient quantity of bottle rockets?
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The Efficient Quantity of a Public Good
Because public goods are non-rival and non-excludable…
• Solving for the efficient quantity requires a vertical summation of the
individual demand curves
• Then can set the SMB = MC
Note: this is different from the horizontal summation with a private good
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A Role for Government Intervention
• Governments can provide public goods to correct the market failure (free
rider problem)
• Use tax revenues to provide a variety of public goods
– Examples?
• The level of government provision is greater than the level of free-market
provision
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Common-Pool Resources
Rival and non-excludable
“The Tragedy of the Commons”: Individuals have less incentive to
take care of (or conserve) things that are commonly owned than
things that they own themselves
• C-P resources are susceptible to market failure
• Inefficiently high levels of exploitation
• Intuition follows form recognizing that use generates a negative
externality
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Example: An Open-Access Fishery
1. There is no way to stop people from fishing (non-excludability)
2. When one person catches a fish, it makes it hard for others to catch fish
(rivalry)
3. People think “if I don’t catch the fish, someone else will”
4. The result is over-fishing
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Possible Ways to Solve the “Tragedy”
• Social Norms
– “The Lobster Gangs of Maine”
– Balinese rice temples
• Establish property rights
– Private ownership
– Tradable fishing rights (individual transferable quotas, ITQs)
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