Sox How to kill the vampires Public goods and Buffy s problem Problems with markets Public goods externalities Prisoner s Dilemmas and Buffy The best TV ever Big points Private goods can exclude access public goods are open to all Market encourages production of private goods not of public goods Tragedy of the Commons and free riding Example of prisoner s dilemma Social regulations and morality needed to overcome collective action problems Does the opportunity to get rich encourage people to create wealth That would be nice Or does it lead them to neglect the public good What about Buffy Why couldn t she make a living She does important work saving the world A lot She risks her life killing bad guys Season 1 s Master was really gross Buffy saved the world And all she got was a tombstone Did you know that McDonalds sued Buffy Sarah Michelle Gellar Where was the beef Saving the world doesn t pay unless you can exclude someone Buffy s problem she produces a nonexclusive good No one will pay for what they can get without paying No one will pay for public goods They would rather free ride Some demons are hot Safety from demons and vampires is nonexclusive Everyone is protected when Buffy kills the bad guys Everyone benefits from clean air good sidewalks the Amherst Common You get these without paying So no one has a personal reason to take care of it Everyone waits for someone else What if we put a fence around the Commons and charged admission Gramercy Park New York By putting a fence and locked gate around the park residents have created a private good People can profit from Gramercy Park because they have privatized it made it an exclusive good Gramercy Park is on the East Side of NYC Basic problem with relying on market No one cares about Externalities Market activity is totally self absorbed We don t care what happens to others Wendy s beef cows cause global warming sinking Tuvalu Goodbye Venice Saving Venice is a Public Good We all benefit regardless of whether we contribute Non exclusivity Buffy produces a public good when she saves the world from vampires and demons Our flowers are a public good I cannot stop you from looking at them nonexcludibility Your viewing doesn t impinge on others The view is nondepletable Real views from my bedroom window Slaying vampires is a public good We all benefit nonexcludibility Your safety does not reduce the safety available for others nondepletibility Why would anyone pay for a public good You get it even if you don t contribute Nonexclusivity Selfish rational will let someone else do it Leave it to Buffy and her friends So why would Buffy save the world She can t charge for a public good Fortunately her Mom taught her good norms OK She can try to charge But who would pay since you could get the world saving even if you don t pay So long as someone else pays Or Buffy does it anyway Good norms help because many important things are not done through markets And markets often don t work well Could we use the market to get Buffy to kill Vampires Problems Free riding Who will contribute money to a public good Why pay when you can get it for free Transactions costs How to reward Buffy Pay her for each Vampire Then she ll only kill them in groups Follow her around counting kills She is a monopolist the only slayer What if she demands a raise Maybe we should just draft Buffy Could we make her kill the Vamps We still have to enforce our rules on her If Buffy wanted to get rich She would rob banks instead of killing vampires She d be good at it Paying for public goods is a prisoner s dilemma problem Socrates observed this at the battle of Delium If we win my contribution will not be essential but I risk death or injury If the Boetians win then my chances of death or injury are higher and my contribution immaterial A selfish Socrates would save himself and flee If all did this it would be a disastrous stampede Basic Prisoner s Dilemma Arrest two criminals put them in separate cells and threaten them both with damnation if they don t talk Prisoner 1 Prisoner 2 Stick to story Rat Stick to story Parole Parole Long jail walk Rat Walk Long jail Jail jail Much of life is prisoner s dilemma We all want someone else to take care of public goods and externalities But when we all wait for someone else nothing gets done Too many free riders Too few vampire slayers The Public Goods Dilemma Would any group of rational and selfish people provide for public goods Ride bus or drive Person 1 Person 2 Ride bus Not bother Ride bus Inconvenient but cleaner air inconvenient but cleaner air Inconvenient and dirty air and feel used convenient and dirty air Not bother Convenient and dirty air Inconvenient and very inconvenient dirty air and dirty air Inconvenient feel used and very dirty air If no one pays then we don t get public goods All free riders no Buffy no public goods This is the prisoner s dilemma outcome individual maximization leads to a collective disaster The Tragedy of the Commons where everyone looks after their own interest over grazes until the commons is used up Take Away Points Markets do not encourage people to produce public goods Social norms can encourage public goods but they are undermined by market incentives Coase if property rights are clearly specified then efficient outcome without government Coase doesn t lead to efficiency because of collective action problems bargaining and a maldistribution of income