Econ 201 1st Edition Lecture 30Outline of Last Lecture 1. Excludability and RivalnessOutline of Current Lecture 1.policy approaches for public GoodsCurrent LecturePolicy Approaches for Public Goods• Public Goods should be provided by government.– In some cases government supplements private provision.– Funding is usually through taxation.• Rely on decentralized government as much as possible. • Decisions should be guided by Benefit – Cost Analysis.• Transparency in government is essential for good decisions.– Provision of Public Goods provides a large opportunity for corruption.The Dilemma of Open Access ResourcesIllustration: Herdsmen on a Pasture• A community of 5 families shares a pasture. Each has 10 animals currently. • Weight gain across the season is 50 kgs./animal. 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.• If another animal is added, reduction in forage reduces weight gain of all animals by about 2%, or 1 kg. • Should more animals be added? • Answer: privately ~ YES and socially ~ NO. • If the resource is Open Access, the private incentive will drive the use pattern, leading to inefficient overuse.Solutions for the Open Access Pasture Problem• Privatize the pasture land, fencing off divisions to establish excludability.• Establish community rules for using the common resource.– Agreed limits on numbers of animals.– Enforce a grazing tax that reflects the externality.• Both solutions present new kinds of problems, but are usually better than allowing OpenAccess to persist. Policy Approaches for Common Resources• Privatizing a Common Resource may be possible. – Reliance on private behavior and markets leads to efficiency.– This is often not feasible for fugitive resources.• Common Resources should be managed collectively.• Direct regulation on extent of use: – Ex. Restrictions on seasons and equipment for fishing.– Informal community regulation may be adequate.• Indirect regulation with market-like instruments:– Access fees are sometimes feasible.– Individual Transferable Quotas may be an option.• Read E. Ostrom for a deeper analysis: Governing the Commons.Logic of Collective Economic Decisions• Competitive markets lead to decentralized decisions based on the interactions of a large number of buyers and sellers. • The results are appropriate for private goods, but not for public goods or common resources. • Rational use of common resources and provision of public goods require an organized means of making community decisions. – Inherently, this is a political process. • Usually this is carried out by government.– Decentralized government (state & local) should be used if feasible.– Government decisions need reliable benefit-cost analyses.– Government should adopt measures to prevent
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