Topic 11: Public goods

Question 1

Market good are generally private goods

Answer 1

Have 2 characteristics:

Excludable

Rival

Absence of these characteristics-> market failure; a reason for gov intervention

Environmental goods often lack one or both of these characteristics

Question 2

Excludable goods

Answer 2

Owned by somebody

Owners have the right to exclude non-owners from consuming the good

-> not possible to charge a price for access to the good

Have well-defined and enforced property rights

‘Non-attenuated’ property rights: essential for market to operate efficiently

Question 3

Rival goods

Answer 3

One consumption of a rival good diminishes amount available for others

Consuming good:

Uses the good

Occupies the good

Uses up the time of the service provider

Question 4

Non-excludable good

Answer 4

Even if there is an owner of the good, they are unable to exclude other people from consuming it (physically and legally impossible)

Question 5

Why is non-excludability a problem?

Answer 5

Lack of clearly defined, transferrable property rights (attenuated property rights)

Probably causes market failure

Private firms unlikely to invest provision of non-excludable good. Cannot charge a price for accessing the good because people cannot be excluded even if they don’t pay

Free-rider problem

If somebody does provide good, others free ride on benefits. No incentive for anyone to cut back. -> over exploitation

Question 6

Non-rival goods

Answer 6

If one person ‘consumes’ a good, the amount of good available for others to enjoy is not reduced

Relatively intangible goods

Question 7

Why is non-rivalry a problem?

Answer 7

If good is non-rival, marginal cost of providing it to an extra consumer zero

Rule for efficient market: MC=P

If P>MC -> consumers who value good as <p>MC will choose not to buy it

But it would have cost society nothing for them to benefit from the good

So them choosing not to buy it is bad -> market failure

If MC=0, then P must =0. If gov forces firms to charge P=0 -> firms go broke </p>

Question 8

Policy options for non-rivalry

Answer 8

Allow firms to charge P>0

Subsidise firms

Support environmental groups

Gov provide good itself

Question 9

Examples of combination

Answer 9

Pure public good (non-excludable, non-rival): existence value

Common property good (non-excludable, rival): open access fishery

Club good(non-rival, excludable): private nature park or private zoo

Question 10

Goods can change categories

Answer 10

Common property good can sometimes become private (if law changes to assign property rights) . Example open-access fishery can become private fishery through tradeable quotas

Pure public good could become club good by allowing right to fence it and charge fees for access

Question 11

Who should pay?

Answer 11

Polluter, beneficiary or cost sharing

However no clear solution