10b. Property Rights, Rivalry, Exclusion and Public Goods

Question 1

What could the government do instead of controlling externalities directly?

Answer 1

Use an indirect approach…

PROPERTY RIGHT

Question 2

What is “property right”?

Answer 2

Property right - the exclusive privilege to use an asset.– describes what economic agents can do with an object or idea

Question 3

What is an example of a “property right”?

Answer 3

Consider two adjacent firms, Alice’s Auto Body Shop, and the Tea House.
- The noise from the auto body shop hurts Theodore’s tea house’s business.

• If no one holds a property right for a good or bad, the good or bad is unlikely to have a price.
• If you do not have the property right, no one would be willing to pay you a positive price for it.

Question 4

What are the 3 key results from the “Coase Theorem” (property rights)?

Answer 4

1. If property rights are not clearly assigned, one firm pollutes excessively, and joint profit is not maximized.
2. Clearly assigning property rights results in the social optimum, maximizing joint profit, regardless of who gets the rights.
3. However, who gets the property rights affects how they split the joint profit. Because the property rights are valuable, the party with the property rights is compensated by the other party.

Question 5

What if either side lacks information about the costs or benefits of reducing pollution?

Answer 5

A nonefficient outcome may occur

This is due to ASYMMETRIC INFORMATION (// incomplete information)

Question 6

If high transaction cost preclude bargaining, what could an alternative system be?

Answer 6

Cap-and-trade system

Question 7

What is a “cap and trade system”?

Answer 7

• The government distributes a fixed number of permits that allow firms to produce a specified amount of pollution.
• These permits not only create a property right to pollute but also limit or cap the total amount of pollution.
• Firms can trade these permits in a market, often using an auction.
• Firms that do not need all their permits sell them to other firms that want to pollute more

Question 8

What is “rivalrous good”?

Answer 8

Good that is used up as it is consumed.

Question 9

What is an “exclusive good”?

Answer 9

Others can be prevented from consuming the good.

Question 10

What is “Open-access common property”?

Answer 10

A resource that is nonexclusive and rivalrous.

Question 11

What is a “club good”?

Answer 11

A good that is nonrival but is subject to exclusion.

Question 12

What happens to “Open-access common property”?

Answer 12

Because people do not have to pay to use open access common property resources, they are overused.

Examples:
- Public lands for hunting, grazing or growing crops.

= Tragedy of the Commons

Question 13

What is a solution to the “commons problem”?

Answer 13

Solutions to tragedy of the commons:

• Government Regulation of Commons
  
  • Taxation
  • Restricting access to the commons
• Assigning Property Rights
  
  • Removes incentive to overuse it

Question 14

What is a “public good”?

Answer 14

• Public good is nonrival good and nonexclusive.
• A public good is a special type of positive externality.

Question 15

Do markets exist for “public goods”?

Answer 15

NO.

Markets for public goods exist only if nonpurchasers can be excluded from consuming them.

• Thus, markets do not exist for nonexclusive public goods.
• Usually, if the government does not provide a nonexclusive public good, no one provides it.

Question 16

What is “free riding”?

Answer 16

Benefiting from the actions of others without paying.

• Free riders want to benefit from a positive externality.
• It is very difficult for firms to profitably provide a public good because few people want to pay for the good no matter how valuable it is to them.

Question 17

What is special about the social demand curve of a public good?

Answer 17

Because a public good lacks rivalry, many people can get pleasure from the same unit of output.

As a consequence, the social demand curve or willingness-to-pay curve for a public good is the VERTICAL sum of the demand curves of each individual.

(private goods aggregate demand is the HORIZONTAL sum!)

Question 18

How can we reduce “free riding”?

Answer 18

Methods that may be used include:
- social pressure
- mergers
- privatization
- compulsion

Question 19

How can a government determine the value consumers place on particular “public goods”?

Answer 19

The government may try to determine the value that consumers place on the public good through:
- surveys
- voting results