Ch 11: Public Goods and Common ResourcesMonday, October 20, 20147:05 PMRival in consumption?The Different Kinds of Goods-Markets work well when the good is ice cream, but they work badly when they good is clean air-Excludability: the property of a good whereby a person can be prevented from using it-Rivalry in consumption: the property of a good whereby one person's use diminishes other people's use-Four types of goods:1. Private goods: goods that are both excludable and rival in consumption2. Public goods: goods that are neither excludable nor rival in consumption3. Common resources: goods that are rival in consumption but not excludable 4. Club goods: goods that are excludable but not rival in consumption Yes NoPrivate Goods-Ice cream cones-Clothing-Congested toll roadsClub goods-Fire protection-Cable TV-Uncongested toll roads Common Resources-Fish in the ocean-The environment-Congested nontoll roadsPublic goods-Tornado siren -National defense-Uncongested nontoll roads Yes Excludable? No Public Goods-Consider a fireworks display. This good is not excludable because it is impossible to prevent something from seeing fireworks and it is not rival in consumption because one person's enjoyment of fireworks does not reduce anyone else's enjoyment of them -The Free-Rider ProblemoIf all 500 citizens in a town each place a $10 value on the experience of a firework show for a total benefit of $5,000 and the actual cost of putting on a fireworks show is only $1,000then it is efficient for that town to have a fireworks display because the benefit exceeds the cost. oA private market would not produce that kind of efficient outcome because customers know they can always see fireworks for free rather than paying for a ticket to see them. Because fireworks are expendable, people have an incentive to be free riders.oFree rider: a person who receives the benefit of a good but avoids paying for itoBecause public goods are not excludable, the free rider problem prevents the private market from supplying them. The government, however, can potentially 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 (use the revenue to hire whoever is running the private market), and make everyone better off. -Some Important Public GoodsoNational Defense: -Once a country is defended, it is impossible to prevent any single person from enjoying the benefit of this defense. When one person enjoys the benefit of national defense, he does not reduce the benefit to anyone else. Thus, the national defense is neither excludable nor rival in consumptionoBasic Research -The patent makes the knowledge created by an inventor excludable. -By contrast, general knowledge is a public good. -Ex: once a theorem is proven, it enters the society's general pool of knowledge that anyone can use without charge. Also, one person's use of the theorem does not prevent any others from using it, making it not rival in consumption -Determining the appropriate level of government support for these endeavors isdifficult because the benefits are hard to measure. The members of Congress who appropriate funds for research usually have little expertise in science so they are not inthe best position to judge what lines of research will produce the largest benefitsoFighting Poverty-Many government programs are aimed at helping the poor. The antipoverty programs are financedby taxes paid by families that are financially more successful -Advocates of antipoverty 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. -Eliminating poverty through a private charity would result in the tendency for people to free ride on the generosity of others, enjoying the benefits of poverty elimination without contributing to the cause. -Government action can solve the problem by taxing the wealthy to raise the living standards of thepoor which can potentially make everyone better off: The poor now enjoy a higher standard of living and those paying taxes now enjoy living in a society with less poverty oAre Lighthouses Public Goods?-The benefit that the lighthouse provides to the ship captain is neither excludable nor rival in consumption, so each captain has incentive to free ride by using the lighthouse to navigate without paying for the service-In some cases lighthouses have been closer to private goods. Instead of trying to charge ship captains for the service, the owner of the lighthouse charged the owner of the nearby port and if they did not pay, the lighthouse was turned off and ships avoided that port. -In deciding whether something is a public good, one must determine who the beneficiaries are and whether they can be excluded from using the good. -If a lighthouse benefits many ship captains, it is a public good. If it primarily benefits a single port owner, it is more like a private good. oThe Difficult Job of Cost-Benefit Analysis- The government provides public goods because the private market on its own will not produce an efficient quantity-Cost-benefit analysis: a study that compares the costs and benefits to society of providing a public good. -Because the good will be free of charge, there is no price with which to judge the value of the good. Quantifying benefits is difficult using results from a questionnaire, and respondents have little incentive to tell the truth of how much they would value the good. Those who would use the good have an incentive to exaggerate the benefit they receive from itThose who would be harmed by the good have an incentive to exaggerate the costs to them to prevent the good from being built or providedoHow much is a life worth?-A town can spend $10,000 on a new traffic light that would reduce the risk of a fatal traffic accident from 1.6 to 1.1. You turn to cost-benefit analysis to decide if you shouldspend the money.-The cost is measured in dollars but the benefit - the possibility of saving a person's life - is not monetary-You have to put a dollar value on a human life to make the decision. -If an infinite value was placed on human life, there would be a stoplight at every street corner and we would all drive large over protective cars. -If you look at the total amount of money a person would have earned if they lived, it ignores other