Public Goods & Common Resources

ECO 230 J.F. O’Connor

Goals

• Classify goods • What is the problem with using the market to provide public goods?

• Optimal production of a public good • The free-rider problem in the provision of public goods • Methods of funding the provision of public goods • The problem of the commons and some solutions

Different Kinds of Goods

• Clay’s Ferry Bridge • Cable TV • WEKU - Public radio • National Defense • Bread • Fire protection • Public education

Important Characteristics of Goods

• Excludability - it is possible to exclude a person from consuming the good • Rivalous - one person’s consumption of a unit of the good precludes anyone else from consuming that unit • Which goods in the previous list have these properties?

Nonrivalous and Nonexcludable

• Nonrivalous good – A good whose consumption by one person does not reduce the amount available for others • Nonexcludable good – A good that is difficult or costly to prevent free riders from consuming it

Classifying Goods

Rivalous Non-rivalous Excludable Non excludable Private good Commons good Collective good Public good

Rivalous Non-rivalous Excludable Private good: Non excludable Bread Congested toll road Public education Commons good : Fish in ocean Commons Congested non-toll roa d Collective good: Cable TV Fire protection Uncongested toll road Public good: National defense Knowledge Uncongested non-toll road WEKU

Public Goods

• The ultimate positive externality!

• If I (or Bill Gates) buy a unit of national defense, it helps protect all people in the country but I (Bill) take account only of the marginal benefit to me (Bill) • The benefit to society is the sum of the benefits to all individuals. For an efficient solution, we should compare the sum of the benefits with the marginal cost.

The Market and Public Goods

• Market solution compares the marginal benefit to one person with marginal cost, while ignoring the benefits to others. • Since it undervalues the good, the market solution will usually result in less of the public good being provided than is socially efficient.

Demand for Private vs. Public Goods

• Private goods – Different individuals are free to consume whatever quantity and quality they choose to buy – Summed horizontally • Public goods – Jointly consumed goods that must be provided in the same quantity and quality for all persons – Summed vertically (due to nonrival)

Fig. 15.1 Generating the Market Demand Curve for a Private Good

Fig. 15.2 Generating the Demand Curve for a Public Good

Fig. 15.3 The Optimal Quantity of Parkland

The Free Rider Problem • Problems in getting people to reveal their preferences. There is a big incentive to free ride when a public good is involved. This gives rise to a difficulty in establishing the demand or social marginal benefit curve for a public good.

• How do we decide how much of a public good to produce? Mainly through the political process but not exclusively.

Private Provision of Public Goods

• Many public goods provided through private organizations: – Donation of funds – New methods of excluding free riders – Private clubs – Sale of by-products

Common Property Resource

• Common grazing area • Fishing area • Environment • Tragedy of the Commons: overgrazing led to land becoming barren. As a result, the town’s woolen industry also died. • Individual adding another sheep does not take into account the effect on other people’s sheep

Solving the Commons Problem

• Divide up the land and give each family a piece. That is what happened during the enclosure movement in Britain in the 1700s. Assign property rights to the resource!

• What about the fishing grounds in the oceans and the environment?

• Buffalo in the U.S. and elephants in Africa?

• Congested roads