CHAPTER 11 Excludability The property of a good whereby a person can be prevented from using it Ask Can people be prevented from using it Free of charge Rivalry in Consumption The property of a good whereby one person s use diminishes other people s use Ask Does one persons use of a good prevent others to use it Private Goods EXCLUDABLE AND RIVAL IN CONSUMPTION Ex An ice cream cone is excludable because you can stop someone else from eating it by simply not giving it to them It is Rival because if one person eats the ice cream cone another person cannot eat the same ice cream cone Public Goods NOT excludable NOT rival in consumption Fireworks National Defense Ex Tornado siren is a public good because it is impossible to prevent anyone from hearing it making it not excludable It is not rival because one person s benefit from the siren does not reduce the benefit of another persons Common Resources RIVAL IN CONSUMPTION BUT NOT EXCLUDABLE Ex Fish in the ocean Rival because when someone catches a fish there is one less fish in the ocean for another person to catch Not excludable because the ocean is so big that no one can stop people from fishing Club Goods EXCLUDABLE BUT NOT RIVAL IN CONSUMPTION Ex Fire Department Excludable because the fire department may choose to let someone s house to burn down Not Rival because once a town has paid for the fire department the additional cost of adding one more house is small Free Rider A person who receives the benefit of a good but avoids paying for it Corrected by adding a tax Ex Someone watching fireworks without paying for it Cost Benefit Analysis A study that compares the costs and benefits to society of providing a public good Approximations Tragedy of Commons A parable that illustrates why common resources are used more than is desirable from the standpoint of a society as a whole Problems Private decision makers use the common resource too much When one person uses a common resource he or she diminishes other people s enjoyment of it Social and Private incentives differ Situation where a good can be 2 types of goods Roads can be either public goods or common resources If a road is not congested then one person s use does not affect anyone else In this case use is not rival in consumption and the road is a public good Yet if a road is congested then use of that road yields a negative externality When one person drives on the road it becomes more crowded and other people must drive more slowly In this case the road is a common resource
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