Economic Policy - Public Goods

Question 1

What two characteristics does a public good have?

What do the opposites mean?

Answer 1

A public good has two characteristics - it is non-excludable and non-rivalrous.

A good or service is excludable if it is possible to control who consumes/benefits from it. Clean air is non-excludable, as we cannot limit someone’s ability to access the air. A potato is excludable, as the owner can control who consumes it (even if I give the potato away for free, I can still choose to give it to one person and not another)

A good or service is rivalrous if consumption/use by one person precludes consumption/use by another person.
Knowledge is non-rivalrous - your knowledge of Pythagoras’ theorem does not prevent me from knowing it also. If I asked two students to answer a question about cost-plus pricing, one would not have to wait for the other to stop ‘using’ the idea before being able to write their answer.

Question 2

What is the difference between a public good and the public good?

Answer 2

A public good is one which is non-rivalrous and non-excludable.

‘The public good’ refers to the welfare of society.

A public good does not necessarily conduce to the public good.

Question 3

Why are public goods a matter of public policy? (4)

Answer 3

• If exclusion is legal rather than inherent then there is the question of whether such exclusion is right
• If a good is non-excludable then the provider cannot demand a
  price.
• Likewise, if a good is non-excludable then people are unlikely to be willing to pay for it (the ‘free rider’ problem).
• If a good is non-rivalrous then there are likely to be potentially large social costs or benefits.

Question 4

What is a common resource

Answer 4

A common resource is a good which is non-excludable and rivalrous. They are generally available to be used by everyone, but usage by one person does affect usage by others

Question 5

Tragedy of the Commons

Answer 5

There is a tendency for common resources to be used up. For
example, if a community has common pastures and each person uses them maximally then the grass might not be sustained and the resource becomes depleted. A similar outcome often occurs in the case of fisheries.