The best things in life are free Most goods in our economy are allocated in markets free of charge When goods are available market forces the that normally allocate resources in our economy are absent The best things in life are free price When a good does not have a attached to it cannot private markets ensure that the good is produced and consumed in the proper amounts In such cases government policy can market failure potentially remedy the that economic well being results and raise THE DIFFERENT KINDS OF GOODS When thinking about the various goods in the economy it is useful to group them according to two characteristics Is the good excludable rival Is the good 1 THE DIFFERENT KINDS OF GOODS Excludability Excludability refers to the property of a good whereby a person can be prevented from using it Rivalry refers to the property of a good whereby Rivalry one person s use diminishes other people s use Four Types of Goods Rival Yes Yes No No Private Goods Natural Monopolies Ice cream cones Clothing Congested toll roads Fire protection Cable TV Uncongested toll roads Common Resources Public Goods Fish in the ocean The environment Congested nontoll roads Tornado siren National defense Uncongested nontoll roads The Free Rider Problem free rider A is a person who receives the benefit of a good but avoids paying for it Since people cannot be excluded from enjoying public good the benefits of a individuals may withhold paying for the good hoping that others will pay for it free rider The problem prevents private markets from supplying public goods 2 The Free Rider Problem Solving the Free Rider Problem government can decide to provide the public The good if the total benefits exceed the costs government can make everyone better off by The providing the and paying for it with public good tax revenue Some Important Public Goods National Defense Basic Research Fighting Poverty The Difficult Job of Cost Benefit Analysis Cost benefit analysis refers to a study that compares the costs and benefits to society of providing a public good In order to decide whether to provide a public good or not the of all those who use total benefits the good must be compared to the of costs providing and maintaining the public good 3 The Difficult Job of Cost Benefit Analysis A would be used to cost benefit analysis estimate the total costs and benefits of the project to society as a whole It is difficult to do because of the absence of prices needed to estimate social benefits and resource costs The value of life the consumer s time and aesthetics are difficult to assess COMMON RESOURCES Common resources like public goods are excludable not They are available free of charge to anyone who wishes to use them rival Common resources are goods because one person s use of the common resource reduces other people s use Tragedy of the Commons Tragedy of the Commons The is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole tend to be used excessively Common resources when individuals are not charged for their usage negative externality This is similar to a 4 Some Important Common Resources Clean air and water Congested roads Fish whales and other wildlife CASE STUDY Why Isn t the Cow Extinct Will the market protect me and the Profit Motive Private Ownership THE IMPORTANCE OF PROPERTY RIGHTS The market fails to allocate resources property rights efficiently when are not well established i e some item of value does not have an owner with the legal authority to control it When the absence of property rights causes a market failure the government can potentially solve the problem 5