11 Public Goods

7/25/2019 11 Public Goods

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11

Public Goods and Common

Resources


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The best things in life arefree

Free goods provide a specialchallenge for economic analysis.


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When goods are available free ofcharge, the market forces thatnormally allocate resources in oureconomy are absent.


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When a good does not have a priceattached to it, private markets cannotensure that the socially optimum amount

will be produced and consumed. Free goods are typically under!produced and

over!consumed

"n such cases, government provision ofsuch goods may raise economic well!being.


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T#$ %"FF$&$'T("'%) *F +**%)

When thinking about the variousgoods in the economy, it is useful togroup them according to twocharacteristics "s the good excludable-

"s the good rival in consumption-


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T#$ %"FF$&$'T("'%) *F +**%)

Excludability

onsider something speci/c that you

would like to have. %oes anybody havethe power or ability to stop you fromusing it-

"fyes, the commodity is excludable, and you will have to pay to consume it

"f no, the commodity is not excludable, and nobody can make you pay to consume it


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T#$ %"FF$&$'T("'%) *F +**%)

Rivalry in consumption

"f you decide to en0oy or use an ob0ect,

can others en0oy it too at the sametime-

"f no, it is a rivalgood

"fyes, the ob0ect is a non-rivalgood


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Figure 1 Four Types of Goods

Rival?

Yes

Yes

Ice-cream cones

Clothing Congested toll roads

Fire protection

Cable TV ncongested toll roads

No

Pri!ate Goods "atural #onopolies

No

Excludable?

Fish in the ocean

The en!ironment Congested nontoll roads

Tornado siren

"ational defense ncongested nontoll roads

Common Resources Public Goods


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1ublic +oods The Free!&ider1roblem

)ince people cannot be e2cluded fromen0oying the bene/ts of a public good,they may refuse to pay, hoping that

others will.That is, people may behave like free riders

3 free-rider is a person who receives thebene/t of a good but avoids paying for it

The free!rider problem prevents privatebusinesses from supplying public goods.


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1ublic +oods The Free!&ider1roblem

)olving the Free!&ider 1roblemThe government can step forward to

provide the public good

3ssuming the total bene/ts e2ceed thecosts.

The government can make everyone

better o4 by providing the public goodand paying for it with ta2 revenues.


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)ome "mportant 1ublic +oods

'ational %efense

Fundamental )cienti/c &esearch

Fighting 1overty


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1ublic +oods ost!5ene/t3nalysis

"n order to decide whether to providea public good or not, the totalbenetsof all those who use thegood must be compared to the costsof providing and maintaining thepublic good.

Cost-benet analysis refers to themeasurement of the costs and bene/tsto society of providing a public good.


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C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 1,

6es or no-

3 town intersection currently hasonly stop signs.

)hould a tra7c light be installed-


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C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 1

6es or no-

"n an ideal situation 8 We could ask each person who uses that

intersection what9s his:her willingness!to!pay for the tra7c light

The tra7c light should be installed if andonly if the total willingness!to!paye2ceeds the cost

The light could be paid for by charging ata2 proportional to each person9swillingness!to!pay


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C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 1.

6es or no-

#owever, in the real world 8 3sking people won9t work

1eople will not reveal their willingness!to!

pay truthfully "f the ta2 is independent of willingness!to!pay,

those who would bene/t:not bene/tfrom thepublic good would have an incentive toe2aggerate the bene/ts:costs

"f the ta2 is related to willingness!to!pay peoplewill understate their willingness to pay

)o, some other kind of cost!bene/t analysiswill be needed


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The %i7cult ;ob of ost!5ene/t3nalysis

3 cost!bene/t analysis is an estimateof the total costs and bene/ts of thepro0ect to society as a whole. "t is di7cult to do this because of the

absence of prices needed to estimatesocial bene/ts and costs.

The value of life, the consumer9s time,and aesthetics are di7cult to measure.


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C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 1/

#ow much is a life worth-

"t may be necessary to know the dollarvalue of a human life in order to decidewhether a new tra7c light would be worththe cost

)tudies say the dollar value of a human lifeis 8 about million

alculations ?alue of lives lost without light @ >.>=A B m

?alue of lives lost with light @ >.>== B m 5ene/t of light @ >.>>C B m @ ,>>>

Yesto tra7c light if and only if cost is less


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C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 10

#ow much is a life worth-

"sn9t it in/nite- 'ot if you see the risks that people take

to avoid paying e2tra

5y observing these choices economistscan estimate the monetary value thatpeople themselves place on their own

lives *ne estimate is million


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Common Resources non-e2cludable and ri!al

Rival?

Yes

Yes

Ice-cream cones

Clothing

Congested toll roads

Fire protection

Cable TV

ncongested toll roads

No

Pri!ate Goods "atural #onopolies

No

Excludable?

Fish in the ocean

The en!ironment

Congested non-toll roads

Tornado siren

"ational defense

ncongested nontoll roads

Common Resources Public Goods

%s common resources are not

e2cludable3 they are a!ailable

free of charge to anyone 4ho

4ishes to use them

Common resources are ri!al goods

because one person5s use of the

common resource reduces other

people5s use


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Tragedy of the ommons

The Tragedy of theCommons is a parable thatillustrates why common

resources are overusedThat is, they are used more

than is desirable from thestandpoint of society as a

whole.The idea of tragedy of the

commons was populariDed bythe biologist +arret #ardin


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ommon resources tend to be overusedbecause they are not e2cludable and sopeople do not have to pay to use them

Eoreover, when a person uses a commonresource, only that person bene/ts,nobody else does ommon resources are rival in consumption.

This is similar to a negative externality. We saw in the previous chapter that negative

e2ternalities lead to over!consumption

C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 66


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ommon resources need to beconserved for future use

#owever, as they are not e2cludable,nobody has the incentive to conservethem

C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 67


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Tragedy of the ommonssolutions

The government can assert ownership ofa common resourceThe government can then control and

restrict the use of a common resourceThe government can conserve and maintainthe resource for use by the people in thefuture

The government can assign ownershiprights to private citiDensThis will convert a common resource to a

private resource

C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 6,


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)ome "mportant ommon&esources

lean air and water

ongested roads

Fish, whales, and other wildlife


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C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 6.

3 )olution to ityongestion

Eotorists driving into central ondon onweekdays between G>> 3.E. and AH> 1.E.pay a daily ta2 of about .

ameras record license plate numbersand nonpayers are charged sti4 penalties.

ongestion in central ondon hasdecreased by H>J.

C>,>>> fewer cars enter the eight sKuaremile restricted area each day.


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3 )olution to ityongestion ondon

#31T$& == 1L5" +**%) 3'% *EE*' &$)*L&$) MG


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3 )olution to ityongestion )ingapore

MN


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3)$ )TL%6 Why "sn9t the ow$2tinct-

Will the market protect me-


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C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 78

"' T#$ '$W) )hould 6ellowstoneharge as Euch as %isney World-

'ational parks can be viewed as eitherpublic goods or common resources.

"f park congestion is light, visits are not

rival in consumption. 3s congestion increases, park entrance

fees could be raised.

The likely increase in revenues8 could be used to improve national parks, and would encourage others to develop new parks.


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C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 71

3)$ )TL%6 6ou9ve +ot )pamO

)ome /rms use spam email to advertise their products.

)pam is not excludable Firms cannot be preventedfrom spamming.

)pam is rival 3s more companies use spam, it

becomes less e4ective. Thus, spam is a common resource.

ike most common resources, spam is free which iswhy we get so much of itO

"f each person had complete ownership rights over hisor her email inbo2, then spammers would have to askfor permission to send spam email

6ou could then charge spammers a price for everyspam email they send you


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*'L)"*' T#$ "E1*&T3'$ *F1&*1$&T6 &"+#T)

The market fails to allocate resourcese7ciently when property rights arenot well!establishedThat is, some item of value does not

have an owner with the legal authorityto control it


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*'L)"*' T#$ "E1*&T3'$*F 1&*1$&T6 &"+#T)

When the absence of property rightscauses a market failure, thegovernment may be able to solve the

problem.The government can assign property rights

and lay the foundation for a market wherenone e2isted before

$2ample the pollution!rights market

The government can also directly regulatethe private use of a common resourceForests are protected in the L)


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L) +overnment &eKuiresFishing 1ermits

http::www.nmfs.noaa.gov:permits.htm HP


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ELINOR OSTROM

Top!down government administration and totalprivatiDation are not the only ways to utiliDe and maintaina common resource. ommunities of users of the resourcemay be able to do this more e7ciently.

7
http://www.nmfs.noaa.gov/permits.htm


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$linor *strom a di4erentview

$linor *strom sharedthe M>>I 'obelmemorial priDe in

$conomics Qfor heranalysis of economicgovernance, especially

the commonsQ )ee

http::nobelpriDe.org:nobelRpriDes:economics:laureates:M>>I:inde2.html

C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 7.


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*strom Tragedy of theommons is not inevitable

5ased on numerous empirical studiesof user!managed /sh stocks,pastures, woods, lakes, and

groundwater basins, she concludedthat common property is often welltended by user associations.

C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 79

*strom9s seven keys to
http://nobelprize.org/nobel_prizes/economics/laureates/2009/index.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/2009/index.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/2009/index.htmlhttp://nobelprize.org/nobel_prizes/economics/laureates/2009/index.html


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*strom s seven keys tosuccessful utiliDation of a

common resource=. &ules clearly de/ne entitlementsM. onSict resolution mechanisms are in placeH. %uties stand in reasonable proportion to

bene/ts

P. Eonitoring and sanctioning is carried outeither by the users themselves or by someonewho is accountable to the users

C. )anctions are graduated, mild for a /rstviolation and stricter as violations are repeated

A. %ecision processes are democraticG. The rights of users to self!organiDe are clearly

recogniDed by outside authorities

C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 7/


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*strom centraliDed control ofresources can fail

3ll too often, resource degradation is due to Sawedintervention by central government.

onsider the satellite imagene2t slideofgrasslands spanning two di4erent 0urisdictions.

"n the southern 0urisdiction, grasslands aremanaged by groups of nomads according totraditional methods.

"n the northern 0urisdiction, grasslands have beencollectiviDed and animal husbandry has beenmoderniDed.

%espite similar numbers of graDing animals peracre, only traditional group management hasprevented the grasslands from degrading and alsoproduced greatest yields.

C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ 70


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*strom centraliDed control ofresources can fail

The choice is notbetween individualcontrol and controlby a centralgovernment

+roups of individuals

can self organiDe andsuccessfully form amini government tomaintain a commonresource that they alluse

Lsers themselvescan both create andenforce rules thatmitigateovere2ploitation

C$%PT&R 11 P'(IC G))*+ %"* C)##)" R&+)RC&+ ,8


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)ummary

+oods di4er in whether they aree2cludable and whether they arerival.

3 good is e2cludable if it is possible toprevent someone from using it.

3 good is rival if one person9s en0oyment

of the good prevents other people fromen0oying the same unit of the good.


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)ummary

1ublic goods are neither rival nore2cludable.

5ecause people are not charged for

their use of public goods, they have anincentive to free ride when the good isprovided privately.

+overnments provide public goods,making Kuantity decisions based uponcost!bene/t analysis.


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)ummary

ommon resources are rival but note2cludable.

5ecause people are not charged fortheir use of common resources, theytend to use them e2cessively.

+overnments tend to try to limit theuse of common resources.

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