7 - Public Goods & Common Resources

Question 1

What are the two main characteristics used to classify goods in the economy?

Answer 1

Excludability and Rivalry

Question 2

What type of good is both excludable and rival?

Answer 2

Answer: Private Goods (Examples include ice-cream cones, clothing)

Question 3

Which type of good suffers from the free-rider problem?

Answer 3

Answer: Public Goods (Non-excludable, Non-rival).
Common goods can also suffer from it.

Question 4

What is a club good? Give an example.

Answer 4

Answer: A club good is excludable but non-rival. Examples include cable TV or cell phone networks.

Question 5

Why do private markets typically fail to supply public goods?

Answer 5

Answer: Due to the free-rider problem - people cannot be excluded from enjoying public goods and may withhold payment hoping others will pay.

Question 6

What is the government’s solution to the free-rider problem?

Answer 6

Answer: Government can provide public goods through tax revenue if total benefits exceed costs.

Question 7

Name three important public goods.

Answer 7

Answer: National Defense, Basic Research, and Fighting Poverty

Question 8

What are the two main challenges to cost-benefit analysis of public goods?

Answer 8

• Absence of prices needed to estimate social benefits and resource costs
• Difficulty in assessing factors like value of life, consumer’s time, and aesthetic values

Question 9

How do common resources differ from public goods?

Answer 9

Answer: While both are non-excludable, common resources are rival (one person’s use reduces others’ use) while public goods are non-rival.

Question 10

What is the Tragedy of the Commons?

Answer 10

Answer: It illustrates why common resources are often used excessively, more than is desirable from society’s standpoint, due to differences between social and private incentives.

Question 11

List three examples of common resources.

Answer 11

Answer: Clean air and water, Congested roads, Fish/whales/wildlife

Question 12

What are three government solutions to market failures?

Answer 12

Allocation of property rights
- Taxes
- Regulation to restrict access (e.g., through issuing licenses)

Question 13

Who was Elinor Ostrom and what was her main contribution to the understanding of commons?

Answer 13

Answer: Elinor Ostrom was a Nobel Prize winner who showed that communities can self-organize to govern commons and that tragedies of the commons are possible but not inevitable.

Question 14

What type of good would an uncongested toll road be?

Answer 14

Answer: Club Good (Excludable, Non-rival)

Question 15

What type of good would a congested non-toll road be?

Answer 15

Answer: Common Resource (Non-excludable, Rival)

Question 16

Why do individual community members lack incentive to reduce their use of common resources?

Answer 16

Answer: Because individually they only contribute to the problem a small amount.

Question 17

What is required to avoid the overuse of commons?

Answer 17

Answer: When property rights aren’t well-established

Question 18

What factor determines whether government should provide a public good?

Answer 18

Answer: Whether the total benefits exceed the costs

Question 19

How is the tragedy of the commons similar to externalities?

Answer 19

Answer: The tragedy of the commons is similar to a negative externality as it involves differences between social and private incentives.

Question 20

What is the free-rider problem?

Answer 20

• A free-rider receives benefits of a good but avoids paying for it
• People cannot be excluded from enjoying public goods
• Individuals may withhold payment hoping others will pay
• This prevents private markets from supplying public goods

Question 21

How can a cost-benefit analysis help public good provision?

Answer 21

• cost-benefit analysis can be used to compare societal costs and benefits of providing public goods
• in order to decide whether to provide a public good or not, the total benefits of all those who use the good must be compared to the costs of providing and maintaing the public good

Question 22

What is the challenge of conducting cost-benefit analysis?

Answer 22

• Absence of prices → needed to estimate social benefits and resource costs
• Difficulty in assessing factors like value of life, consumer’s time, and aesthetic values