public goods

Question 1

what does it mean if a good is excludable

Answer 1

if a person can be prevented from using it when they do not pay for it

Question 2

what makes a good rival?

Answer 2

if its use by one person diminishes another persons’ use

Question 2

are private, public, common resources and club goods rival or excludable?

Answer 2

private goods: both excludable and rival
public goods: neither excludable nor rival
common resources: rival but not excludable
club goods: excludable but not rival

Question 2

what are examples of rival and excludable goods?

Answer 2

rival and excludable; food, clothing, bike

non-rival and excludable; netflix, football tickets (if not full)

rival and non-excludable; fish in the ocean

non-rival and non-excludable; streetlights, fireworks

Question 2

what goods are competitive markets efficient for?

Answer 2

private goods only

Question 2

what is the optimal provision of a public good?

Answer 2

• govs should provide them if total benefits > total costs
• the optimal quantity of a public good is such that marginal social benefit gained from an extra unit provided is equal to the marginal cost of providing that extra unit: MSB=MC
• quantity such that MSB=MC is efficient (maximises total welfare)
• producing less means forgoing some units whose production cost is lower than their value to the customers
• producing more means producing some units whose production cost is higher than their value to the customers

Question 2

what is the issue with public goods?

Answer 2

people cannot be excluded from enjoying public goods without paying for them because they are non excludable

the free-rider problem exists

Question 2

what are common resources?

Answer 2

like public goods are not excludable: available free of charge to anyone who wishes to use them
but unlike public goods, they are rival; one person’s use of the common resource reduces other people’s use e.g. fish in the sea, wildlife, forests, crowded roads

Question 3

what happens to public goods in private markets?

Answer 3

• if the individuals are rational and self-interested only, they do not want to pay for a good
• with private markets only, the public good will be underproduced and consumed, even though it may have value to consumers which is higher than the production costs. This would not be an efficient resource allocation.

Question 3

how to do a cost-benefit analysis for public goods?

Answer 3

in order to decide whether to provide a public good or not (and what amount to provide), the total benefits of all those who use the good must be compared to the costs of providing and maintaining the public good

Question 3

what is a cost-benefit analysis?

Answer 3

a study that compares the costs and benefits to society of providing a (public) good

Question 3

what is a free-rider?

Answer 3

is a person who receives the benefit of a good without paying for it. This problem prevents private markets from supplying public goods.

Question 3

what are solutions to free-rider problem?

Answer 3

the government can decide to produce the public good

• they should do that if the total benefits for society > total costs for society (usually measured as the cost of producing the good)
• to finance the public good, the government can require everyone to pay a tax and use the tax revenue to provide the public good (private sector cannot do this)

Question 4

what happens if the use of common resources is unregulated?

Answer 4

individuals only act in their own self-interest (not socially responsible), common resources will tend to be over used (compared to what would be efficient from the point of view of social welfare)

known as the tragedy of the commons

Question 4

what is the tragedy of the commons by aristotle?

Answer 4

“what is common to many is least taken care of, for all men have greater regard for what is their own than for what they possess in common with others”

Question 5

how is education a merit good?

Answer 5

2 key benefits:
- private benefits: career prospects, networks, learning, individuals may underestimate private benefits
- social benefits: stock of human capital in a country, individuals don’t take account of social benefits when making decisions about their education, so left to the private market education would be underconsumed

• left to private markets, eduction would be under-consumed
• in most countries, education is compulsory until a certain age and further education is subsidised

Question 5

what causes tragedy of the commons?

Answer 5

social and private incentives differ (MSB<MPB) = no incentive to reduce the size of its flock

the tragedy is due to an externality:
- allowing one’s flock to graze on the common land reduces its quality for other families
- people neglect this external cost, resulting in overuse of land

Question 5

how can we avoid tragedy of the commons?

Answer 5

• regulate or tax the use of common resources e.g. regulations regarding hunting seasons, fishing, co2 emissions by cars
• turn the common resource into a private good e.g. divide a common land into smaller pieces and make them private

Question 6

what are merit goods?

Answer 6

sometimes consumers have imperfect information about the benefits of a good and are not able to value them as appropriately as a result.

merit goods: the actual benefit of a good is higher than the value attached to them by consumer
they can be provided by the private sector, but in equilibrium they may be under-consumed because the actual value for consumers (and/or society) is higher than what consumers are willing to pay

Question 6

how should elephants be regulated and why is this different to cows?

Answer 6

they both have commercial and societal value but cows are privately owned and elephants are a common resource, each poacher has incentive to kill as many as possible.

solution;
- Kenya, Uganada: regulation (illegal to kill them and sell their ivory - laws not easy to enforce)
- Malawi, Zimbabwe: privatisation (made elephants a private good by allowing people to kill them, but only those on their property -> landowners now have incentive to preserve them on their land to attract tourists)

Question 7

how are property rights related to public goods?

Answer 7

the market fails to allocate resources efficiently when property rights are not well-established (a good does not have an owner with the legal authority to control it)

when the absence of property rights causes a market failure e.g. tragedy of the commons, the government can try to solve the problem:
- help define property rights e.g. land privatisation
- regulate private behaviour e.g. wild animal hunting

Question 8

how can governments intervene with merit goods?

Answer 8

governments may subsidise merit good or make their consumption compulsory to some level to deal with this inefficiency

Question 10

how are healthcare, insurance and pensions merit goods?

Answer 10

individuals are sometimes bad at assessing risks (e.g. being sick, having a car accident, being old and poor) so they underestimate the value of some insurances (healthcare, car accidents, pensions)

governments:
- subsidise healthcare and make some insurance covers compulsory
- encourage savings for private pensions through financial incentives

Question 10

what are de-merit goods?

Answer 10

goods which generate private or social costs (negative effects) which are not fully taken into account by consumers of those goods e.g. cigarettes, drugs, alcohol

as a consequence, such goods tend to be over-consumed if left to market mechanism

in many countries such goods are taxed more heavily e.g. cigarettes and/or their consumption is strictly regulated e.g. drinking and driving, no public smoking or forbidden e.g. illegal drugs