Introduction to Economics:

Public Goods and Common Resources

M. Mujiya Ulkhaq, Ph.D.

Department of Industrial Engineering
Diponegoro University, Semarang, Indonesia For undergraduate (bachelor) level,
E-mail: [email protected] Department of Industrial Engineering,
Homepage: https://sites.google.com/view/mujiyaulkhaq/ Diponegoro University, Indonesia
 The Different Kinds of Goods
When thinking about the various goods in the economy, it is useful to group them by two characteristics:
• Excludability: If people can be prevented from using a good, the good is excludable.
• Rivalry in consumption: If one person’s use of a unit of a good reduces another person’s ability to use it, the
good is rival in consumption.
These two characteristics define four categories:
• Private goods: both excludable and rival in consumption.
Most goods in the economy are private goods: You don’t get one unless you pay for it, and once you have it, you
are the only person who benefits.
• Public goods: neither excludable nor rival in consumption.
That is, people cannot be prevented from using a public good, and one person’s use of a public good does not
reduce another person’s ability to use it.
• Common resources: rival in consumption but not excludable.
• Club goods: excludable but not rival in consumption.

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 The Different Kinds of Goods (2)

Although the figure separates goods into four distinct categories, the boundaries between the categories can be
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 hard, 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.

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 Public Goods
• The “free rider” is a person who receives the benefit of a good but avoids paying for it.
o Because fireworks are not excludable, people have an incentive to be free riders.
o Because people would have an incentive to be free riders rather than ticket buyers, the market would fail to
provide the efficient outcome.
o Because public goods are not excludable, the free-rider problem prevents the private market from supplying
them.
o The government, however, can remedy the problem. If the government decides that the total benefits of a
public good exceed its costs, it can provide the public good, pay for it with tax revenue, and potentially make
everyone better off.
• Some important public goods:
o National defense. National defense is one of the most expensive public goods. In 2023, the budget for the
Ministry of Defense of Indonesia (only) is about Rp 22.43 trillion.
o General knowledge. For example, a mathematician proved a theorem. Once it is proven, the knowledge is
not excludable: the theorem enters society that anyone can use without charge. The theorem is also not rival
in consumption: One person’s use of the theorem does not prevent any other person from using the theorem.
o Fighting poverty. Many government programs are aimed at helping the poor.

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 Public Goods (2)
• The government provides public goods because the private market on its own will
not produce an efficient quantity. Yet deciding that the government must play a
role is only the first step. The government must then determine what kinds of
public goods to provide and in what quantities.
• Suppose that the government is considering a public project, such as building a
new highway. To judge whether to build the highway, it must compare the total
benefits for all those who would use it to the costs of building and maintaining it;
this is a study called a cost–benefit analysis, refers to a study that compares the
costs and benefits to society of providing a public good.
• Cost–benefit analysts have a tough job. Because the highway will be available to
everyone free of charge, there is no price with which to judge the value of the
highway. Simply asking people how much they would value the highway is not
reliable.

What kind of good is this?

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 Common Resources
• Common resources, like public goods, are not excludable: They are available free of charge to anyone who wants to
use them. Common resources are, however, rival in consumption: One person’s use of the common resource reduces
other people’s ability to use it.
• Thus, common resources give rise to a new problem: Once the good is provided, policymakers need to be concerned
about how much it is used.
• “Tragedy of the commons” is a parable that illustrates why common resources are used more than is desirable from
the standpoint of society as a whole. When one person uses a common resource, she diminishes other people’s
enjoyment of it. Because of this negative externality, common resources tend to be used excessively. The government
can solve the problem by using regulations or taxes to reduce consumption of the common resource. Alternatively, the
government can sometimes turn the common resource into a private good.
• Some important common resources:
o Clean air and water. Environmental degradation is a modern “tragedy of the commons”.
o Congested roads. If a road is congested, then use of that road yields a negative externality. When one person
drives on the road, it becomes more crowded, and other people must drive more slowly.
o Fish, whales, and other wildlife. Oceans remain one of the least regulated common resources. Two problems
prevent an easy solution: (i) many countries have access to the oceans, so any solution would require international
cooperation among countries that hold different values; (ii) because the oceans are so vast, enforcing any
agreement is difficult, as a result, fishing rights have been a frequent source of international tension even among
normally friendly countries.

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 References
• Mankiw, N. Gregory (2021), Principles of Economics, 9th Edition, Cengage.

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