Public Goods, Common Resources, & Externalities

Question 1

Private Goods

Answer 1

Excludable (not everyone can have it, usually because there is a price) and rival in consumption (there is a limited amount)

Ex: wheat, bathroom fixtures

Efficiently provided in markets

Question 2

Public Goods

Answer 2

Non-excludable (everyone can have it) and non-rival in consumption (no limit)

Ex: national defense, public sanitation

Markets fail to supply them efficiently (if there is no profit to be made market will move away from it), governments have to do it

Question 3

Common Resources

Answer 3

Non-excludable but rival in consumption

Ex: Clean water, biodviersity

Tend to be overused, leading to problems like depletion such as overfishing/hunting

Question 4

Artificially Scarce Goods

Answer 4

Excludable but non-rival in consumption

Ex: Wi-Fi, on demand TV

Often provided inefficiently due to pricing structure

Question 5

Free-Rider Problem

Answer 5

Problem occuring when individuals do not pay for their consumption of a non-excludable good (consume health care but don’t pay taxes)

Leads to underprovision of public goods

Question 6

Externalities

Answer 6

Indirect effects of a transaction on third parties not involved in said transaction

Negative and positive

Ex: People affected by pollution from the creation/purchase of a factory (negative)
You consuming education benefits society as a whole (positive)

Question 7

Market Failure

Answer 7

What happens when free market does not allocate resources efficiently

Often happens with public goods and common resources. Market struggles allocating for goods that are non-excludable and non-rival.

Question 8

Cost-Benefit Analysis

Answer 8

Governments use this analysis to estimate the social cost and benefit of providing a public good

Goal is to determine the optimal provision level

Question 9

Solutions for Common Resource Overuse

Answer 9

Imposing taxes/regulations, assigning property rights (making it excludable), creating tradable licenses to control access and, thus, usage

Question 10

Network Externalities

Answer 10

When value of a good to an individual is greater when more people use it.

Ex: Communication systems (more people to talk to), and transportation networks (more people, less cost)