WEEK 10 - Chapter 11: Public Goods and Common Resources

Question 1

Characteristics of goods.

Answer 1

In thinking about the various goods in the economy, it is useful to group them according to two characteristics:
. Is the good excludable?
. Is the good rivalrous?

Question 2

Different types of goods.

Answer 2

. Private goods
. Public goods
. Common resources
. Club goods

Question 3

What is excludable?

Answer 3

The property of a good whereby a person can be prevented from using it.

Question 4

What is rival in consumption?

Answer 4

The property of a good whereby one person’s use diminishes other people’s use.

Question 5

What are private goods?

Answer 5

Private goods are both excludable and rival in consumption.

Consumption of a private good reduces amount available for others. Purchase entitles property rights.

Most goods in the economy are private goods like ice-creams: You don’t get one unless you pay for it and once you get it you are the only person who benefits.

Question 6

What are public goods?

Answer 6

Public goods are neither excludable nor rival in consumption.

That is, people cannot be prevented from using a public good and one person’s enjoyment of a public good does not reduce another person’s enjoyment of it (pure public goods).

Question 7

What are common resources?

Answer 7

Common resources are rival in consumption but not excludable.

Question 8

What are club goods?

Answer 8

Club goods are excludable but not rival in consumption.

Question 9

Private goods examples.

Answer 9

Eg. An ice-cream.

It is excludable because a seller can prevent a buyer from eating one – the seller simply doesn’t give it to the buyer.

It is rival in consumption because if one person eats an ice-cream, another person cannot eat the same ice-cream.

Question 10

Public good examples.

Answer 10

Eg. Lighthouses, police, and NATIONAL DEFENCE.

Once the country is defended from foreign aggressors, it is impossible to prevent any single person from enjoying the benefit of this defence (so it is not excludable).

Moreover, when one person enjoys the benefit of defence, he does not reduce the benefit to anyone else (so it is not rival in consumption).

Question 11

Common resource examples.

Answer 11

Eg. fish in the ocean are rival in consumption: When one person catches fish, there are fewer fish for the next person to catch.

Yet these fish are not an excludable good because, given the vast size of the ocean, it is difficult to stop fishermen taking fish out of it.

Question 12

Club good examples.

Answer 12

Eg. Fire protection in a small town.

It is easy to exclude people from enjoying this good; the fire brigade can just let their houses burn down.

Yet fire protection is not rival in consumption. Firefighters spend much of their time waiting for a fire, so protecting an additional household is unlikely to reduce the protection available to others.

In other words, once a town has set up a fire brigade, the extra cost of protecting one more household is small.

Question 13

What are quasi-public goods?

Answer 13

AKA near public goods.

. They are non-rival up to a point (until congestion occurs)
. Can exclude others

Eg. Museums, roads, bridges, parks, cable-TV, internet access

Question 14

Why will revenue be insufficient to cover costs of producing a public good?

Answer 14

. An additional unit consumed does not affect consumption by others
. Consumers are not Competing
. The market is not competitive
. Consumer can offer a very low (or no) payment in exchange for consumption of an additional unit.

CONSUMERS HAVE MARKET POWER

Question 15

The free-rider problem.

Answer 15

Once public good is produced, it does not cost anything for others to enjoy it.

Hence, consumers will have an incentive to “free ride”.

Can consume the good without paying for it:
Nation defence, improvements in workplace health and safety,

Question 16

Why are public goods an example of market failure?

Answer 16

Pure public good may not be provided at all by a competitive market.

Pure public good may be provided but not in a sufficient quantity.

Question 17

What is a free Rider?

Answer 17

A free rider is a person who receives the benefit of a good but avoids paying for it. Because people would have an incentive to be free riders rather than ticket buyers, the market would fail to provide the efficient outcome.

Question 18

Private provision of public goods.

Answer 18

. Differences among individuals in their demand for the public goods,
. Altruism among potential donors to the public good, and
. Utility from one’s own consumption to the public good.

Question 19

Public provision (government) of public goods due to free-rider problem.

Answer 19

Government intervention is sometimes necessary because the private sector may under provide public goods due to the free-rider problem.

Question 20

Barriers that make it difficult for the government to provide goods.

Answer 20

. Private responses to public provision, or “crowding out”;
. Difficulty of measuring the costs and benefits of public goods; and
. Difficulty of determining the public’s preferences for public goods.

Question 21

Solving the free-rider problem.

Answer 21

The government can decide to provide the public good if the total benefits exceed the costs.

The government can make everyone better off by providing the public good and paying for it with tax revenue.

Question 22

What is tragedy of the commons?

Answer 22

The Tragedy of the Commons is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.

. Common resources tend to be used excessively when individuals are not charged for their usage.
. This is similar to a negative externality.
. An explanation for the extinction of species.

Question 23

Tragedy of anti-commons.

Answer 23

A resource might have several right holders who prevent it from being used efficiently.
. Multiple rights to exclude.
. There will be under-utilisation of a resource.

Eg. Shopfronts in Russia

Question 24

The importance of property rights.

Answer 24

The market fails to allocate resources efficiently when property rights are not well established (i.e. some item of value does not have an owner with the legal authority to control it).

When the absence of property rights causes a market failure, the government can potentially solve the problem.

Question 25

Funding public goods.

Answer 25

To decide whether or not it should fund a public good, the government must conduct a study of the total benefits and costs of the good.

Cost–benefit analysis: a study that compares the costs and benefits to society of providing a public good.

Question 26

Cost-benefit analysis.

Answer 26

This is very difficult to do, because measuring how much individuals will value a specific good is problematic.

This difficulty implies that the efficient supply of public goods is much more challenging than the efficient supply of private goods, because buyers of the private good reveal its value to the sellers.

Question 27

Primary aims of government.

Answer 27

. Supply public goods.
. Redistribute real resources.
. Assist market forces.
. Correct undesirable market outcomes.

Question 28

Reasons for regulation.

Answer 28

. Respond to market failure (e.g. externalities & public goods).
. Income Guarantee (e.g. minimum wages).
. Quality Guarantee (e.g. product information, occupation licensing, doctors).
. Paternalistic – the State knows what is best.

Question 29

Reasons for deregulation.

Answer 29

. Price flexibility
. Resource allocation efficiency
. Competition policy results in gains for consumers
. Government failure.