Classification of Goods Flashcards
What are public goods?
Goods that are neither excludable nor rivalrous in their use
What do excludable and rivalrous mean?
Excludability: whereby a person can be prevented from using a good/service
Rivalry: whereby one person’s use diminishes other people’s use
Identify where the four types of goods fall on the excludability/rivalrous graph
Why does market failure occur with public goods?
Market failure arises due to ability of economic agents to Free Ride
This means consumers receive the benefit from the good/service without paying for it
The problem this creates is that if left to the private sector, these goods would be underproduced
Why does market failure arise with common resources?
Market failures arise due to the ability of agents to free ride & diminish another’s benefit
How do we graph public goods?
Individual graphs are summed vertically
Opposite to the private good, total benefit is the combination of marginal benefits
You can’t sum up the benefits of a private good because they are excludable – this is not the case with public goods
The social equilibrium is where Marginal Cost = Social Marginal Benefit
This situation will not occur if the provision of goods is left to the private market
This gives rise to the idea that the government has a role to step in and provide the public good
This ensures that the socially optimum outcome is achieved
This is almost always what tax funds are used for
How do we graph common pool resources?
The issue with common resources stems from the benefit the market provides
With more and more people using the resource, the eventual depletion means that the social marginal benefit falls below the private marginal benefit
It becomes a collective action problem – it is best to limit consumption, but because people will see an opportunity to increase their short-term gain, many will do it
What are the benefits and drawbacks of using regulation to solve common resource problems?
The government can step in and establish a quota on the amount that can be used
This is common in the management of fisheries
The benefit of a quota is that it:
moves the market towards the social marginal benefit
The cost is that it:
creates an incentive to ‘race to fish’ - suppliers overcapitalise in an attempt to collect as much of the good as they can
governments also spend resources on monitoring and enforcing the quota
this is also especially difficult when the resources stretch across the globe, relying on the goodwill of nations
How would establishing a tax assist in solving common resource problems?
Governments can create a tax wedge to increase the private marginal cost so that it is equal to the social marginal cost
Alternatively, it can decrease private marginal benefit so that it is equal to social marginal benefits
This is fantastic if it hits the social marginal benefit, but still works even if it is only moving it towards it slightly
How can establishing property rights solve common resource problems?
Turn the common resource into an excludable resource, giving it property rights and ability to exclude/negotiate costs
How can tradable permits help to solve common resource problems?
Establishes a quota, but gives ownership of that quota to actors in the private market
What differentiates a tradable permit from a quota is that it gives you the right to catch a certain amount of fish
You don’t have to do it straight away
Anybody for whom the permit is too expensive can exit the fishery – this leads to fishing occurring with the efficient actors only
This does lead to initial issues of equity and distribution, but over time, it is generally more effective
