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ECO2011 Basic Microeconomics - Lecture 15

This document discusses different types of goods and services. It defines private goods as both rival and excludable, public goods as neither rival nor excludable, common resources as rival but not excludable, and club goods as excludable but not rival. The key challenge with public goods is the free rider problem which prevents private markets from supplying them efficiently. For common resources, the tragedy of the commons describes how they are prone to overuse without regulation due to lack of property rights. Governments aim to address these issues through cost-benefit analysis and limiting consumption.

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14 views

ECO2011 Basic Microeconomics - Lecture 15

This document discusses different types of goods and services. It defines private goods as both rival and excludable, public goods as neither rival nor excludable, common resources as rival but not excludable, and club goods as excludable but not rival. The key challenge with public goods is the free rider problem which prevents private markets from supplying them efficiently. For common resources, the tragedy of the commons describes how they are prone to overuse without regulation due to lack of property rights. Governments aim to address these issues through cost-benefit analysis and limiting consumption.

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1194390705
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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ECO2011 Basic Microeconomics

Fall 2020
Emily Zheng
Attributes of goods and services

We have seen that markets are better at providing the efficient


level of some goods and services than others.

This is related to some important attributes of the goods and


services: whether their consumption is rival and/or excludable.

Rivalry: refers to the property of a good whereby one person’s


use diminishes other people’s use.

Excludability: refers to the property of a good whereby a person


can be prevented from using it.
The Different Kinds of Goods

• Four Types of Goods


• Private Goods: Goods that are both excludable and rival in consumption

• Public Goods: Goods that are neither excludable nor rival in consumption

• Common Resources: Goods that are rival in consumption but not excludable

• Club Goods: Goods that are excludable but not rival in consumption
Four Types of Goods

Rival?
Yes No
Private Goods Club Goods

Yes • Ice-cream cones • Fire protection


• Clothing • Cable TV
• Congested toll roads • Uncongested toll roads
Excludable?
Common Resources Public Goods

No • Fish in the ocean • Tornado siren


• The environment • National defense
• Congested nontoll roads • Uncongested nontoll roads
Public Goods

• A free-rider is a person who receives the benefit of a good but avoids paying for it.

• Since people cannot be excluded from enjoying the benefits of a public good,
individuals may withhold paying for the good hoping that others will pay for it.

• The free-rider problem prevents private markets from supplying public goods.
Efficient level of production of a public good
If we know the market
demand curve,
determining the
efficient level of
production of a public
good is the same as
for a private good: it is
where the demand and
supply curves intersect.

But how do we obtain


the market demand
curve for a public good,
for example security
protection? Figure 5.10
Constructing market demand curve—private good case
The Demand for a Public Good

The market demand curve for private goods is determined by


adding horizontally the quantity of the good demanded at each
price by each consumer.
For instance, in panel (a), Jill demands 2 hamburgers when the
price is $4.00, and in panel (b), Joe demands 4 hamburgers
when the price is $4.00.
So, a quantity of 6 hamburgers and a price of $4.00 is a point on
the market demand curve in panel (c).
Constructing market demand curve—public good case

To find the demand curve for a


public good, we add up the
price at which each consumer is
willing to purchase each
quantity of the good.
In panel (a), Jill is willing to pay
$8 per hour for a security guard
to provide 10 hours of protection.
In panel (b), Joe is willing to pay
$10 for that level of protection.
Therefore, in panel (c), the price
of $18 per hour and the quantity
of 10 hours will be a point on
the demand curve for security
guard services.
The Free-Rider Problem

• Solving the Free-Rider Problem


• The government can decide to provide the public good if the total benefits exceed
the costs.
• The government can make everyone better off by providing the public good and
paying for it with tax revenue.
The Difficult Job of Cost-Benefit Analysis

• Cost-benefit analysis refers to a study that compares the costs and benefits to
society of providing a public good.

• In order to decide whether to provide a public good or not, the total benefits of all
those who use the good must be compared to the costs of providing and
maintaining the public good.

• It is difficult to do because of the absence of prices needed to estimate social


benefits and resource costs.
Common Resources

• Common resources, like public goods, are not excludable.


They are available free of charge to anyone who wishes to use
them.

• Common resources are rival goods because one person’s


use of the common resource reduces other people’s use.
Tragedy of the Commons

• The Tragedy of the Commons is a parable that illustrates why common resources
get used more than is desirable from the standpoint of society as a whole.

• Common resources tend to be used excessively when individuals are not charged for their usage.

• This is similar to a negative externality.


Efficient level of consumption of a common resource

For a common resource


such as wood from a forest,
the efficient level of use,
QEfficient, is determined by
the intersection of the
demand curve—which
represents the marginal
benefit received by
consumers—and S2, which
represents the marginal
social cost of cutting the
wood.

But each individual tree-cutter ignores the external cost, resulting


in QActual wood being cut. As the quantity is not optimal, there is
deadweight loss as a result.
Is there a way out of the tragedy of the commons?

The source of the tragedy of the commons is the same as the


source of negative externalities: lack of clearly defined and
enforced property rights.

When the absence of property rights causes a market failure, the


government can potentially solve the problem.
• Public goods are neither rival nor excludable.

• Because people are not charged for their use of public goods, they have an
incentive to free ride when the good is provided privately.

• Governments provide public goods, making quantity decisions based upon cost-
benefit analysis.
• Common resources are rival but not excludable.

• Because people are not charged for their use of common resources, they tend to
use them excessively.

• Governments tend to try to limit the use of common resources.

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