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CHAPTER 11

Public goods and

common resources

EXCLUDABLE RIVAL IN CONSUMPTION

• An excludable is the property of a good • Rival in consumption is the property of a good

whereby a person can be prevented from whereby one person’s use diminishes other
using it. people’s use.
• For example, an ice-cream is excludable • For example, an ice-cream is rival in
because a seller can prevent a buyer from consumption because if one person eats an
eating one – the seller simply doesn’t give it ice-cream, another person cannot eat the
to the buyer. same ice-cream.

FOUR TYPES OF GOODS PRIVATE GOODS

• Private goods are goods that are both

excludable and rival in consumption.
• Most goods in the economy are private goods.
You don’t get the good unless you pay for it and
once you get it you are the only person who
benefits.

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PRIVATE GOODS CLUB GOODS

• Club goods are goods that are excludable but

• When we analysed supply and demand, and the
not rival in consumption.
efficiency of markets, we implicitly assumed that
goods were both excludable and rival in • Consider fire protection in a small town. It is
consumption. easy to exclude people from enjoying this good;
the fire brigade can just let their houses burn
• Examples of private goods include ice-creams,
down.
clothing and congested toll roads.

CLUB GOODS COMMON RESOURCES

• Fire protection is not rival in consumption. • Common resources are goods that are rival in
Fire-fighters spend much of their time waiting for consumption but not excludable.
a fire, so protecting an additional household is • For example, fish in the ocean are rival in
unlikely to reduce the protection available to consumption. When one person catches fish,
others. there are fewer fish for the next person to
• Other examples of club goods include cable TV catch.
and uncongested toll roads.

COMMON RESOURCES PUBLIC GOODS

• Fish are not an excludable good because, • Public goods are goods that are neither
given the vast size of the ocean, it is difficult to excludable nor rival in consumption.
stop fishermen taking fish out of it.
• For example, national defence is a public good.
• Other examples of common resources include Once the country is defended from foreign
the environment and congested non-toll roads. aggressors, it is impossible to prevent any
single person from enjoying the benefit of this
defence (so it is not excludable).

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PUBLIC GOODS, COMMON

PUBLIC GOODS
RESOURCES AND EXTERNALITIES
• Moreover, when one person enjoys the benefit • For both public goods and common resources,
of defence, she does not reduce the benefit to externalities arise because something of value
anyone else (so it is not rival in consumption). has no price attached to it.
• Other examples of public goods include • If one person were to provide a public good,
knowledge and uncongested non-toll roads. such as defence, other people would be better
off and yet they could not be charged for this
benefit.

PUBLIC GOODS, COMMON

FREE RIDER
RESOURCES AND EXTERNALITIES
• Similarly, when one person uses a common • A free rider is a person who receives the
resource, such as the fish in the ocean, other benefit of a good but avoids paying for it.
people are worse off and yet they are not
• For example, the existence of free riders can
compensated for this loss.
lead to the under-provision of public goods.
• Because of these external effects, private
decisions about consumption and production can
lead to inefficient outcomes, and government
intervention can potentially raise economic
wellbeing.

COULD A MARKET PROVIDE COULD A MARKET PROVIDE

FIREWORKS DISPLAYS? FIREWORKS DISPLAYS?
• Imagine that an entrepreneur decided to put on • The market would fail to provide the efficient
a fireworks display. The entrepreneur would outcome because some individuals who gain a
have trouble selling tickets to the event benefit from the fireworks do not compensate
because potential customers would quickly the entrepreneur for the costs involved in its
figure out that they could see the fireworks production.
even without a ticket.
• Fireworks are not excludable, so people have
an incentive to be free riders.

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COULD A MARKET PROVIDE

SOME IMPORTANT PUBLIC GOODS
FIREWORKS DISPLAYS?
• National defence: The defence of a country is a
• The government can potentially remedy the classic example of a public good. It is also one
problem. If the government decides that the of the most expensive. While people disagree
total benefits exceed the costs, it can provide about the appropriate level, almost no one
the public good and pay for it with tax revenue, doubts that some government spending for
making everyone better off. defence is necessary.

SOME IMPORTANT PUBLIC GOODS SOME IMPORTANT PUBLIC GOODS

• Basic research: General knowledge is a public – Profit-seeking firms conduct research to develop
good. For example, a mathematician cannot new products that they can patent and sell, but they
do not spend much on basic research. Their
patent a theorem. Once a theorem is proved,
incentive, instead, is to free ride on the general
the theorem enters society’s general pool of knowledge created by others. Instead, government
knowledge that anyone can use without subsidises the basic research carried out by
charge. Moreover, one person’s use of the universities and research organisations.
theorem does not prevent any other person
from using the theorem.

SOME IMPORTANT PUBLIC GOODS SOME IMPORTANT PUBLIC GOODS

– Taxing the wealthy to raise the living standards of the
• Fighting poverty: Many government programs poor can potentially make everyone better off. The
are aimed at helping the poor. Unemployment poor are better off because they now enjoy a higher
benefits, the old-age pension and disability standard of living, and those paying the taxes are
support pension provide a basic income for better off because they enjoy living in a society with
individuals and families who do not have less poverty.
adequate alternative income. – Advocates of anti-poverty programs claim that
fighting poverty is a public good. Even if everyone
prefers living in a society without poverty, fighting
poverty is not a ‘good’ that private actions will
adequately provide.

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THE DIFFICULT JOB OF COST–

COST–BENEFIT ANALYSIS
BENEFIT ANALYSIS
• Cost–benefit analysis is a study that compares • The government provides public goods
the costs and benefits to society of providing a because the private market on its own will not
public good. produce an efficient quantity. The government
• For example, cost–benefit analysis reveals must determine what kinds of public goods to
whether it is efficient for the government to provide and in what quantities.
provide a public good.

THE DIFFICULT JOB OF COST– THE DIFFICULT JOB OF COST–

BENEFIT ANALYSIS BENEFIT ANALYSIS
• Suppose that the government is considering • Because the highway will be available to
building a new highway. To judge whether to everyone free of charge, there is no price with
build the highway, it must compare the total which to judge the value of the highway.
benefits of all those who would use it with the Simply asking people how much they would
costs of building and maintaining it. value the highway is not reliable.

THE DIFFICULT JOB OF COST– THE DIFFICULT JOB OF COST–

BENEFIT ANALYSIS BENEFIT ANALYSIS
• The efficient provision of public goods is • Sellers reveal their costs by the prices they
intrinsically more difficult than the efficient are willing to accept.
provision of private goods. • By contrast, cost–benefit analysts do not
• Private goods are provided in the market. observe any price signals when evaluating
Buyers of a private good reveal the value whether the government should provide a
they place on it by the prices they are willing public good.
to pay.

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PRIVATE PROVISION OF PUBLIC PRIVATE PROVISION OF PUBLIC

GOODS GOODS
• Consider free-to-air television. Anyone with a • How can a firm generate revenue from a
TV can tune in and watch programs for free, product that consumers enjoy for free?
and one viewer watching a TV program does • In the case of free-to-air television,
not reduce the enjoyment other viewers can broadcasters produce and sell a second,
derive from the same program. complementary, private good – advertising.
• Yet private firms operate television stations • The broadcaster sells airtime to advertisers.
as for-profit businesses.

PRIVATE PROVISION OF PUBLIC PRIVATE PROVISION OF PUBLIC

GOODS GOODS
• Advertisers want to reach a wide audience, • Other public goods that are provided by
so they are willing to pay more if their private firms include search engines such as
advertisement is shown during a program Google and Bing, and video-sharing sites
that has many viewers. such as YouTube and Vimeo. These firms are
• This gives television stations an incentive to funded by revenue from advertisements
broadcast programs that viewers want to displayed on web pages.
watch. In this sense, viewer demand drives
what is shown on television.

TRAGEDY OF THE COMMONS TRAGEDY OF THE COMMONS

• A commons is communal land surrounding a
• The tragedy of the commons is a parable that village. Each family in the village has the right
illustrates why common resources get used to graze sheep on the commons.
more than is desirable from the standpoint of
• When one family’s flock grazes on the common
society as a whole.
land, it reduces the quality of the land available
• The tragedy of the commons refers to the for other families. Because people neglect this
overgrazing of communal land surrounding negative externality when deciding how many
medieval English villages. sheep to own, the result is an excessive
number of sheep.

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TRAGEDY OF THE COMMONS CLEAN AIR AND CLIMATE CHANGE

• Overgrazing eventually damages the land’s
ability to replenish itself, destroying the • Greenhouse gasses emitted into the air in one
common resource for all families in the village. country spread around the world contributing to
climate change in every country.
• The community can prevent the tragedy in a
number of ways. The town could regulate the
number of sheep in each family’s flock, or
divide up the land among town families.

CLEAN AIR AND CLIMATE CHANGE CLEAN AIR AND CLIMATE CHANGE

• When a government in one country regulates • The Coase theorem suggests that nations can
greenhouse gas emissions, it considers the enter into a treaty, such as the Kyoto Protocol,
benefits created by the emitting industries in its which commits the signatories to reduce their
own markets, as well as the effects of these respective emissions. The treaty behaves like
emissions on the local environment. It does not contract, internalising the externality.
consider how local emission will affect the
climate of other countries.

CONGESTED ROADS CONGESTED ROADS

• If a road is congested, use of that road yields a • Sometimes congestion is a problem only at
negative externality. When one person drives certain times of day. The efficient way to deal
on the road, it becomes more crowded, and with these externalities is to charge higher tolls
other people must drive more slowly. during rush hour, providing an incentive for
• One way for the government to overcome the drivers to alter their schedules.
problem of road congestion is to levy a toll or a
congestion charge. A toll is, in essence, a
corrective tax on the externality of congestion.

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FISH, WHALES AND OTHER FISH, WHALES AND OTHER

WILDLIFE WILDLIFE
• Many species of animals are common resources.
• Two problems prevent regulation of fish stocks.
Fish, for instance, have commercial value, and
First, many countries have access to the
anyone can go to the ocean and catch whatever
oceans, so any solution would require
is available.
international cooperation among countries that
• Each person has little incentive to maintain the hold different values. Second, because the
species for the next year. Just as excessive oceans are so vast, enforcing any agreement
grazing can destroy the town common, is difficult.
excessive fishing can destroy commercially
valuable marine populations.