ECON 201 1st Edition Lecture 15Outline of Last Lecture I. Measures of Surplusa. Definition of total surplusII. Evaluating the Market EquilibriumIII. Government Interventiona. Definition of laissez-faireIV. Effects of TaxesV. Deadweight LossOutline of Current Lecture I. Public Goods and Common ResourcesII. Important Characteristics of Goodsa. Definition of excludabilityb. Definition of rivalry in consumptionIII. The Different Kinds of GoodsIV. Public Goodsa. Definition of free riderb. Definition of cost-benefit analysisV. Analyzing a Real-World Economic SituationVI. Common ResourcesVII. The Tragedy of the Commons: A Parablea. Definition of the Tragedy of the CommonsVIII. Policy Options to Prevent Overconsumption of Common ResourcesCurrent LectureI. Public Goods and Common ResourcesThe market provides most goods. We consume goods mostly without paying for them; examplesof these include parks, national defense, clean air and clean water. The government can sometimes improve market outcomes and thus allow for a greater provision of goods. II. Important Characteristics of GoodsThere are two main characteristics of goods: excludability and rivalry in consumption. Excludability is when a person can be prevented from using that good by another person consuming it. An example of this is a purchase of a latte or cable TV. It is your good, and others cannot (legally) use it or take it from you. Rivalry in consumption is when one person’s use of the good diminishes other people’s use. Examples of these include fish in the ocean or These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.environmental resources. These goods can be categorized by being excludable, a rival in consumption, both, or neither. Examples are in the table below. Rival in Consumption?Excludable? Yes NoYes Private Good(pizza, lattes)Club Good/Natural Monopoly(cable TV, fire protection)No Common Resource(fish in the ocean, environmentalresources)Public Good(national defense, tornado siren)A club good or a natural monopoly is sometimes referred to as an “impure public good” while a public good is sometimes called a “pure public good”. III.The Different Kinds of GoodsOur focus in this class is on public goods and common resources, particularly when property rights are unclear or in the presence of externalities. In these cases, private decisions lead to inefficient outcomes. IV. Public GoodsThe biggest problem with public goods is known as the “free rider” problem. A free rider is a person who receives the benefit of the good but does not pay for it. The result is that this good is not produced, even if buyers collectively value the good more than it costs to produce it. Ultimately, it becomes the role of the government to provide this good. If the benefit outweighsthe cost, then the government will provide the good by taxing the people who benefit from it. To understand if the benefit outweighs the cost, the government performs a cost-benefit analysis. A cost-benefit analysis is a study that compares the costs and benefits of providing a public good. It is different with a public good than with other goods because measuring the benefits of public goods is particularly difficult. At best, this is imprecise and difficult to evaluate. For example, it is hard to determine the benefits of a park. An economist can tell you the amount the park took to build or the amount of money required to upkeep the park, but they are unable to give an exact monetary amount of the benefits of the park on the community. V. Analyzing a Real-World Economic SituationThe following quote was posted on the slide in class:“Over all, the American government seems to be turning its back on its traditional role ofproducing and investing in national public goods. If there is any consistent tendency in recent government spending, it is that spending on entitlements like Social Security and Medicare — which provide mostly private benefits — is rising and that investment and spending on national public goods is falling.As a budget category, “government consumption and gross investment” is a proxy for many kinds of public goods spending. As a share of gross domestic product, it has fallen to less than 19 percent, from a peak of 24 percent in the 1980s, with no expectedreversal in sight. Yet total government spending is expected to increase because of income transfers and entitlements. Neither political party seems able to halt that logic oreven cares to make an issue of it.Focusing government on the production of public goods may sound like a trivial issue, too obvious to be worth a mention. But, in fact, we have been failing at it, and the consequences could be serious indeed.”-Tyler Cowan, Economist, New York Times May 2013The premise is that there are some things that the government needs to provide (public goods). This is their job. What is the government doing instead? They are giving only 19 percent of the money to public goods; that other money is going to private benefits, such as Medicare. Frankly,the government is not doing a good job of providing public goods. Instead, they are using that money to produce private goods, not public as they should. Nobody else will be able to provide these public goods for the American people, so this might be a serious issue.VI. Common ResourcesCommon resources are also known as “open-access resources”. These resources are not excludable, as the government cannot prevent free riders from using them. However, common goods are rivals in consumption; each person’s use reduces the other’s ability to use it. This is a job for the government, as they must ensure these resources are not being overused.VII. The Tragedy of the Commons: A ParableThe Tragedy of the Commons is an economic parable by Garrett Hardin. In his parable, a medieval village has houses surrounding the town center where they keep their cattle. In this common area, everyone uses the lands for free and shares their cattle between them; all of their houses protect the cattle. If an individual adds another cow to the center, then it is beneficial to them, as everyone gets more cattle products while the individual does not have to provide for the upkeep or food of the cow. Just as the benefits of the cow are shared between the people, so the costs are too. The private incentives (using the land for free)