Slide 1Knowledge RecapProperties of GoodsTypes of GoodsTypes of GoodsPublic GoodsPublic GoodsCommon ResourcesCommon ResourcesECON 203: Principles of MicroeconomicsClass 12: Public Goods and Common Resources1Knowledge Recap•For most trades and goods, market equilibrium leads to efficient allocation of resources.•Market failure occurs when a trade results in an externality, that is a social cost or benefit that is not reflected in a cost or benefit for the buyers or sellers.•Some goods have properties that make them particularly prone the problem of externalities and market failure .2Properties of Goods•Excludability.–The property of a good whereby a person can be prevented from using it.–Example: Netflix vs. Friday night fireworks in the Dodger stadium.•Rivalry in consumption.–The property of a good whereby a person’s use diminishes other people’s use. –Example: a sandwich vs. a song on the radio.3Types of Goods•Private goods.–Are both excludable and rival in consumption.•Public goods.–Are neither excludable nor rival in consumption.•Common resources.–Are rival in consumption but not excludable.•Club goods.–Are excludable but not rival in consumption.4Types of Goods•Examples.5 Rival?Yes NoExcludable?YesPrivate Goodsice-cream conesclothingcongested toll roadsClub Goodsprivate parkscable TVuncongested toll roadsNoCommon Resourcesfish in the oceanthe environmentcongested free roadsPublic Goodsnational defensefirework displayuncongested free roadsPublic Goods•Similar to positive externalities: only one person needs to provide the good for society to benefit.–Free rider: a person who receives the benefit of a good without paying for it. – Consequence of free riders: private firms under-supply public goods because people have no incentives to pay for their provision.6Public Goods•Solutions to public good problem.–Public provision of a good if the social benefit of its consumption is greater than the cost of production.–Often it is hard to determine the type and amount of public goods that should be provided. •Cost-benefit analysis is made difficult by the presence of non-pecuniary goods, such as clean streets. 7Common Resources•Similar to negative externalities: people don’t take into account how their consumption affects others. –Tragedy of the Commons: parable of a town with shepherds whose greed leads to overuse of a common resource in the form of grass.–Consequence of common resources: because they are rival but not excludable, they are overused since each individual only considers his/her benefit but not social cost.8Common Resources•Solutions to common resources.–Regulation.–Clear definition and enforcement of property rights.
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