public goods and the commons Flashcards
for the market to deliver an efficient allocation, what set of circumstances does it need to satisfy?
- Markets exist for all goods and services produced and consumed.
- All markets are perfectly competitive.
- All transactors have perfect information.
- Private property rights are fully assigned in all resources and commodities.
- No externalities exist.
- All goods and services are private goods. That is, there are no public goods.
- All utility and production functions are ‘well behaved’
what are the two main characteristics of goods?
1) rivalry/ divisablility : refers to whether one agents consumption of the good is at the expense of anothers consumption
2) excludability : refers to whether an agent can prevent other agents from consuming the same good
what goods are non excludable and non rivalrous?
pure public goods
what goods are excludable but non rivalrous?
club goods/ congestible resources
what goods are excludable and rivalrous?
pure private goods
what goods are non excludable and rivalrous
commons
what are the commons?
rivalry and no excludability, and open access resources such as ocean fisheries that lies outside of the territorial waters of any nation
what are club/ congestible goods and
no rivalry u to the point at which congestion sets in and excludability. an example is services to vistors provided by a wilderness area or a private beach
what is the efficient level of provision of a public good?
when the aggregate/ social marginal willngness to pay is equal to social marginal costs.
what does the demand curve represent ?
the marginal benefit from consumption and the willingness to pay curve.
what is the willingness to pay?
the maximum amount of money people are willing to pay for a good or service that increases their well being
in the case of a public good, is the marginal benefits equal to their willingness to pay?
no it is not as the fact the good is non excludable means that their willingness to pay is smaller then the marginal benefit they receive from the good
what is the free rider effect?
the free rider effect causes the under provision of non excludable goods. this is because the fact that they can access the good without paying means they have the incentive to wait for others to purchase. as everyone has the same incentive it will result in nobody or only a few people purchasing the good therefore there will lack of demand and therefore an underprovision will occur
who is the main supplier of public goods?
the government. this is because the government can impose mandatory taxes in order to fund the provision of the public good and prevent the free rider effect occuring. this will then cover the production costs of supplying the public good which is missing in the free market
what is the flaw with the government providing public goods?
they may not know how much of a public good people will want
why can markets not provide public goods at all?
it is due to the non excludability as the direct link between payment and access is broken. because private enterprises cannot restrict the use of the good to only those consumers who have paid for the good, they will not produce public goods because they fail to get paid a price for their consumption by all consumers
why might donations fail to raise sufficient funds for an efficient provision of public goods?
they might fail to raise sufficient funds due to the free riding incentive. since public goods are non excludable, each person can receive the benefits of the public goods regardless of whether they pay so while some may be willing to donate many others will just wait. as each individual has the incentive to wait, few people will donate so there will be an underprovision of public goods
what is preference revelation in economics?
The government can act correctly only if it can obtain truthful information about preferences, and this information might not be willingly revealed by the people who have it
in the absence of excludability, consumers will?
1) not be willing to reveal their real strength of their preference for the public good
2) tend to underestimate the strength of their preferences to try to shift more of the cost burden to the other consumers
what are the commons/ open access natural resources?
they are rivalry ( refers to whether one agents consumption of the good is at the expense of another’s consumption )
they are non excludable ( refers to whether an agent can prevent other agents from consuming the same good)
what are examples of the commons?
the groundwater, the forests, the wildlife (rhinos, passenger pigeons), ocean fisheries
what is the tragedy of the commons?
it is the situation in which individuals with access to a shared resource act in their own interest ultimately deplete the resource by adopting a self maximising behaviour and having no incentive to conserve the resource and use the belief that others wont act in the best interest of the group to justify their selfish behaviour
why does open access fishing a tragedy of the commons?
no fishing boat can be prevented from exploiting the fishery as open waters are not subject to private property. and the explotation is definitely rivalrous
what are the assumptions for the tragedy of the commons for open access fisheries?
each fisher is only concerned with his/her profits and no barriers to entry/exit
all fishers use the same type of boat
price of land fish (per ton) is constant
cost of operating a fishing boat (per boat) is consant
as we increase the number of boats at sea, the amount of fish that each boat is able to land increases first then decreases following a inverted U shape function
