Public Goods

Question 1

What are the two characteristics of Public Goods

Answer 1

• Non-rivalry: Consumption of the public good by one household does not reduce the quantity available for consumption by any other.
• Non-excludability: if the public good is supplied, no household can be excluded from consuming it.

Question 2

Global public goods (GPG)

Answer 2

Public goods at the international level.

Question 3

What is the basic problem with public goods?

Answer 3

with, non-excludability, both PGs and CPRs generate free-rider problems.

Question 4

What is the private provision of public goods?

Answer 4

Individual households make personal contributions of money or time to organisations that provide public goods.

Question 5

What is the Public choice prediction with private provision of public goods?

Answer 5

A FREE RIDER PROBLEM - personal contributions will be too low, because individuals households do not take into account the benefits going to other households.

Question 6

Public Provision: State Failure

Answer 6

Public provision does not have a free rider problem because individuals can be compelled to contribute to the public good via taxation.

• But, the political outcome may not maximise net benefits for society, for several reasons:
• Majority voting does not take account of intensity of preference.
• Influence of interest groups.

Question 7

Who is the most important person to research in this module and does her book concern?

Answer 7

Elinor Ostrom (1994) Governing the Commons.
Her book studies governance of “small” common property resources (CPRs)
-E.g. fisheries, grazing area, groundwater basins, communal forests etc.
- Located in one country, 50-15000 persons (appropriators) “who are heavily dependent on the CPR for economic returns.

Question 8

What problem is concerned with CPRs ( Common Property Resources) and what are its properties?

Answer 8

• Rivalrous and Non-excludable.
• CPRs are not public goods ( as use of CPRs is rivalrous), but free access to CPRs gives rise to similar free-rider problem, known as “ the tragedy of commons”(Hardin 1968).

Question 9

Hardin’s Tragedy of the commons

Answer 9

• Two fishermen deciding whether to use a CPR (fishing area)
• Plausible costs and benefits: B/2 > C
• Efficient for only one to fish, e.g. by “taking turns” but, a strictly dominant strategy for each to fish, so both fish in equilibrium.
• overexploitation of the resource; “the tragedy of the commons”, basically a free-rider problem.
  Game is discrete, for convenience: in case where amount of fishing can be varied, efficiency can also be achieved by both parties scaling back production.

Question 10

What is Ostrom’s basic argument?

Answer 10

• The free-rider problem is often solved in practice via a third way between state management and free access: collective governance of CPRs
• Methodological point: Users of CPRs are not just “economically rational” i.e. selfish and passive, but historically, have organised themselves to overcome the tragedy of the commons.

Question 11

What are the General Design Principles?

Answer 11

1) . Clearly defined set of users of the CPR
2) . Voice; users have a say in changing the rules governing CPR use.
3) . Monitoring; monitors are accountable to the users or are the users.
4) . Graduated sanctions, depending on seriousness of the offence.
5) . Conflict resolution mechanism
6) . Rights to organise; users can devise their own institutions free from state control.

Question 12

Collective Governance of CPRs: examples from Ostrom

Answer 12

• inshore fishery at Alanya, Turkey
• Around 100 local fishers using small boats
• Over the 1970s, a rotation system developed for the CPR
• Self-Enforcing, as fisherman have an incentives to report rule-breakers.
• Disputes were settled informally at the local coffee house.
• Small number of landowners and “appropriators drawing water form the same aquifers in southern CA.
  -Problems due to over-extraction from early 1940s onwards.
  Bargaining “in the shadow of the law” generally successful - nearly all interested parties agreed on proportionate reductions.

Question 13

Is Ostrom’s argument relevant ?

Answer 13

• Her methodological point that users of CPRs are generally not passive, selfish maximisers is a good one is widely accepted.
• But some argue that the specifics that of “third way” CPR management is mainly applicable to two special cases:
  -Small scale CPRs, especially in developing countries, where the state is weak and/or infrastructure is poor (Araral, E. (2014).
• International cooperation to deal with GPGs, because there is no “Word Government”.
  In the intermediate cases, bargaining, under the shadow of the law, or state intervention to create property rights probably works better.

Question 14

GPC: Definition and exmaples

Answer 14

When benefit is non-rivalrous and non-excludable at the global level

• Clear example: C02 emissions reduction : (also CFC emissions reductions)
• Some other “global” public goods are really only international public goods among a subset of countries (e.g. disease control, control of acid rain)

Question 15

Can Ostrom’s design principles be scaled up?

Answer 15

• Small numbers of countries who interact repeatedly
• Monitoring usually possible
• Users deign scheme (international treaties)
• But graduated punishments ( or punishments of any type) usually not used in international treaties.

Question 16

Free- Riding : Non - Participation Vs. Non-Compliance for GPG

Answer 16

A Country can either refuse to ratify an international treaty (non-participation) or to ratify it, but then renege on the agreement (non-compliance)

Question 17

What is more common? Non-particapation or Non-compliance?

Answer 17

• Non participation is much more common than non- compliance.
  E.g. several countries (e..g China and US) failed to ratify the Kyoto Protocol and some did so long delay (e.g. Australia, Russia).
• Non compliance very rare, even though treaties rarely punish it explicitly. Rarity of compliance can be explained due to costs of loss of reputation from reneging on international agreements.

Question 18

The Non-partication Problem: Possible Solutions (1)

Answer 18

1) . Reduce economic cost of treaty of compliance
- Costs can be reduced by using flexible instruments.
- Emissions taxes, “cap and trade”
- Both instruments lower the cost of compliance relative to “command and control” (quotes set by government).
- Also investment in new technology ( solar, wind-power and batteries etc).

Question 19

The Non-partication Problem: Possible Solutions (2)

Answer 19

Ratification thresholds ( Game Theory Example)

• requiring a ratification threshold can help to internalise positive spillovers from international treaties between n countries.
• Optimal choice of threshold 1

Question 20

Emissions Taxes Vs. Cap and Trade

Answer 20

• Taxes are politically difficult as they involve big transfers to government.
• Also, taxes leave total amount of abatement uncertain, a negative especially if pollutants have strong threshold effects.
• Cap and trade: hybrid instrument,overcomes these two difficulties.
• Combines known aggregate abatement with efficient allocation of abatement burden across polluters via permit trading.

Question 21

Ratification Thresholds and its purpose/ solution to the prisoners dilemma.

Answer 21

• Ratification Thresholds can be a way of encouraging participation ( Black and de Meza 1993)
• In the example of game theory, the only interesting ratification threshold is r=2 i.e. treaty comes into force only if both countries ratify it.
• Assume that if ratified, both countries obey the treaty ( because of loss of reputation from reneging on a ratified agreement).

Question 22

What does the Prisoners Dilemma example suggest about Classic GPG : Reducing CO2 Emissions? Regards to Climate Change

Answer 22

• There is a strictly dominant strategy to not reduce, but countries are better of co-operating.

Question 23

Conclusions of this Lecture

Answer 23

• At the international level, Ostrom’s collective agreements are international treaties.
• But, significant non-participation in international treaties is a problem.
• Reducing costs of participation via use of flexible instruments, and use of ratification thresholds, can reduce the problem.
• Both flexible instruments and ratification thresholds, can reduce the problems.