Lesson 11 public goods + common resources Flashcards
Two characteristics to classify goods
1) excludability = if people can be prevented from using good –> excludable, if impossible to prevent ppl from using good –> not excludable
2) rivalry in consumption = if one person’s use reduces another’s use –> rival in consumption
Private goods
1) excludable + rival in consumption
2) ice cream cone –> excludable bc you can prevent someone from getting one + if one person eats an ice cream cone another person cannot eat that same one
most goods in economy private goods
public goods
1) neither excludable nor rival in consumption
2) tornado siren –> impossible to prevent others from hearing it + one person getting benefit doesn’t reduce benefits for others
Common resources
1) rival in consumption but not excludable
2) fish in ocean –> cannot stop others from fishing BUT if you fish u reduce # of fish others can get
Club goods
1) excludable BUT not rival in consumption
2) ex = satellite tv –> if you don’t pay bill then you lose tv access BUT your use of tv doesn’t diminish another person’s ability to use
Free ride
1) problem with many public goods –> you can see fireworks for free for example BUT it’s not profitable for private businesses to supply it bc nobody wants to pay for it
2) solution = if govt believes that total benefit exceeds cost, it can provide public good by using tax revenue
Most important public goods
1) national defense = paying for military –> everyone enjoys the benefit + nobody loses out
2) basic research = (cannot be specific bc that can be patented –> becomes excludable) BUT general research like theorems cannot be patented
3) fighting poverty –> public good so bc of free rider problem private sector will not donate enough so govt must intervene
problem with cost/benefit analysis of public goods
1) difficult to put a price on it –> everyone enjoys it for free (roads for example)
2) rough approximations at best
3) big problem w. value of human life –> cannot say it’s infinite BUT also cannot say its equal to how much $ would’ve earned
The three residents of Smallville are considering a fireworks display. Clark values this public good at $80, Lana at $50, and Pete (who dislikes fireworks) at -$30. Fireworks cost the town $120, or $40 per person. The efficient outcome is for the village
not to provide the public good because the total value of all residents is less than the total cost.
(since 80+50-30 = 100 WHICH less than 120)
Tragedy of commons
1) occurs when social + private incentives differ
2) arises bc of negative externality which ppl ignore
3) ppl keep increasing sheep herds BUT then it becomes too much and land is destroyed, problem –> individually have no incentive to reduce their flock size
Tragedy of commons moral
1) common resources used excessively
2) solve it by taxing (to eliminate neg externality) OR by making it private
Public goods generally ____ without govt intervention
1) underproduced
Important common resources
1) clean air + water
2) congested roads (could add congestion taxes to reduce)
3) fish/whales/wildlife = excessive hunting bc no incentive to not get as much as possible
