UMD ECON 200 - Chapter 11: Public Goods and Common Resources

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Chapter 11: Public Goods and Common Resources The Different Kinds of Goods: ! excludable- property of a good whereby a person can be prevented from using it ! rival in consumption- property of a good whereby one person’s use diminishes other people’s use 1. private goods- goods that are both excludable and rival in consumption a. ex. ice cream: excludable b/c it is possible to prevent someone from eating one b. ice cream cone is rival in consumption b/c if one person eats one, another person cannot eat the same one 2. public goods- neither excludable nor rival in consumption a. people cannot be prevented from using a public good b. one person’s use of a public good does not reduce another person’s ability to use it 3. common resources- rival in consumption but not excludable a. ex. Fish in the ocean are rival in consumption; when one person catches fish, there are fewer for the next person b. fish are not excludable b/c it is difficult to stop fishermen from taking fish from the ocean 4. natural monopoly- good is excludable but not rival in consumption a. ex. Fire protection: firemen can exclude houses by letting them burn down b. not rival in consumption b/c once a town has paid for the fire dept the cost of protecting one house is small Public Goods: ! ex. Fireworks: impossible to exclude someone from seeing, one person does not affect another person’s enjoyment The Free-Rider Problem: ! ex. Fireworks in Smalltown, USA o 500 residents place $10 value on fireworks ($5000 benefit), cost of $1000 to display o Because the $5,000 benefit exceeds the $1,000 cost, it is efficient for Smalltown to have a fireworks display ! Free rider- person who receives the benefit of a good but avoids paying for it ! Because public goods are not excludable, the free-rider problem prevents the private market from supplying them ! If the gov’t decides that total benefits of a public good exceed its costs, it can provide the public good, pay for it with tax revenue, and make everyone better off Some important Public Goods: ! Naional Defense ! Basic research ! Fighting Poverty The Difficult Job of Cost-Benefit Analysis: ! cost-benefit analysis- study that compares the costs and benefits to society of providing a public good ! analysts do not have any price signals to observe when evaluating whether the gov’t should provide a public good; findings on the costs/benefits of public projects are approximations Common Resources: ! not excludable: free of charge to anyone who wants to use them ! rival in consumption: One person's use of the common resource reduces other people's ability to use it ! tragedy of the commons- story that illustrates why common resources are used more than is desirable from the standpoint of society as a whole Tragedy of the Commons: ! Many of the town's families own flocks of sheep and support themselves by selling the sheep's wool ! Sheep graze on land called Town Common that is collectively owned by the residents ! As years pass, number of sheep increase (land does not), land starts to become barren ! no single family has an incentive to reduce the size of its own flock because each flock represents only a small part of the problem ! Lesson: When one person uses a common resource, he or she diminishes other people's enjoyment of it. Because of this negative externality, common resources tend to be used excessively. The government can solve the problem by using regulation or taxes to reduce consumption of the common resource. Alternatively, the government can sometimes turn the common resource into a private good Some Important Common Resources: clean air and water, congested


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UMD ECON 200 - Chapter 11: Public Goods and Common Resources

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