PRINCIPLES OF MICROECONOMICS (HSS1021)

Chapter 11: Public Goods and Common Resource

Learning Objectives:

To study

 What are public goods?

 What are common resources?

Give examples of each.

 Why do markets generally fail to provide the efficient amounts of these

goods?

Context:

Chapter 11 explains the different types of goods and its characteristics. Considers
some of the important public goods in the economy. It also makes us understand
the concepts of excludability and rivalry in consumption. It explains the free rider
problem and how to solve the same in the market economy.

Keywords:

Public good, Private good, Common Resource, Club Good, Excludable, Rival, Free
Rider Problem
 Chapter 11: Public Goods and Common Resource

Introduction:

In this chapter, we examine the problem that arises for the allocation of resources
when there are goods without market prices. Our analysis will shed light on one of
the ten principles of economics in chapter one. Government can sometimes improve
market outcomes. When a good does not have a price attached to it, private
markets cannot ensure that the good is produced and consumed in the proper
amounts. In such cases, government policy can potentially remedy the market
failure and raise the economic well-being.

How well do markets work in providing the goods that people want? The answer to
this question depends on the good being considered. As we discussed in chapter
seven, a market can provide the efficient number of candies: the price of candies
adjusts to balance the demand and supply, and this equilibrium maximises the
sum of consumer and producer surplus. Yet we discussed in chapter ten, the
market cannot be counted on to prevent manufactures from polluting the air we
breathe; the buyers and sellers in the market typically do not take into account the
external effects of their decisions. Thus markets work well when the good is candy,
but they work badly when the good is clean air.

When thinking about the various goods in the economy, it is useful to group them
according to two characteristics:

 Is the good excludable?

 Is the good rival?

Excludability

 Consider something specific that you would like to have. Does

anybody have the power or ability to stop you from using it?

 If yes, the commodity is excludable,

 and you will have to pay to consume it

 If no, the commodity is not excludable,

 and nobody can make you pay to consume it

 Excludable: fish tacos, wireless internet access

 Not excludable: FM radio signals, national defense

Rivalry in consumption

 If you decide to enjoy or use an object, can others enjoy it too at the
same time?

 If no, it is a rival good

 If yes, the object is a non-rival good

 Non rivalry in consumption means that more consumption of a good by one

person does not imply less consumption of it by another person.

 Rival: Bench in a park, consuming grapes

 Not rival: Sunshine

Different kinds of goods

Private goods: excludable, rival in consumption

Example: laptop

Public goods: not excludable, not rival

Example: public sanitation

Common resources: rival but not excludable

Example: common grazing land

Natural monopolies: excludable but not rival

Example: e library
Types of Goods

 The boundaries between the categories are sometimes fuzzy.

 Whether goods are excludable or rival in consumption is often a matter of

degree.

 Fish in an ocean may not be excludable because monitoring fishing is so

difficult, but a large enough coast guard could make fish at least partly
excludable.

 Similarly, although fish are generally rival in consumption, this would be

less true if the population of fishermen were small relative to the population
of fish.

ACTIVE LEARNING
Categorizing roads

 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.

Answers

 Rival in consumption? Only if congested.

 Excludable? Only if a toll road.

Four possibilities:

Uncongested non-toll road: public good

Uncongested toll road: natural monopoly

Congested non-toll road: common resource

Congested toll road: private good

The Different Kinds of Goods

 This chapter focuses on public goods and common resources.

 For both, externalities arise because something of value has no price

attached to it.

 So, private decisions about consumption and production can lead to an

inefficient outcome.

 Public policy can potentially raise economic well-being.

Characteristics of Public Goods:

 Non rival in Consumption: One person’s enjoyment of the benefits of a public

good does not interfere with another’s consumption of it.

 Non excludable: A characteristic of most public goods: Once a good is

produced, no one can be excluded from enjoying its benefits.

Public Goods: The Free-Rider Problem

 Since people cannot be excluded from enjoying the benefits of a public good,
they may refuse to pay, hoping that others will.

 That is, people may behave like free riders

 A free-rider is a person who receives the benefit of a good but avoids

paying for it

Solving the Free-Rider Problem

 The government can step forward to provide the public good

 Assuming the total benefits exceed the costs.

 The government can make everyone better off by providing the public
good and paying for it with tax revenues.

Conclusion:

Goods differ in whether they are excludable and whether they are rival in
consumption. A good is excludable if it is possible to prevent someone from using
it. A good is rival in consumption if one person’s use of the good reduces the ability
to use the same unit of good. Markets work best for the private goods, which are
both excludable and rival in consumption. Markets do not work as well for other
types of goods.

Public goods are neither rival in consumption nor excludable. Examples of public
goods include fireworks displays, national defence, and creation of fundamental
knowledge. Because people are not charged for their use of the public good, they
have an incentive to free ride when the good is provided privately.

Common resources are rival in consumption but non excludable. Examples include
common grazing land, clean air, and congested roads. Because people are not
charged for their use of common resource, they tend to use them very excessively.
Therefore, governments use various methods to limit the use of common resources.