Week 10: Externalities, Public Goods & Common Resources

Question 1

When thinking about the various goods in the economy, it is useful to group them according to two characteristics:

Answer 1

• Is the good excludable?

* Is the good rival?

Question 2

Excludability refers

Answer 2

to the property of a good whereby a person can be prevented from using it (for example, if they haven’t paid for it)

Question 3

Rivalry refers

Answer 3

to the property of a good whereby one person’s use diminishes other people’s use, (for example, if I eat an apple, you can’t eat the same apple)

Question 4

Non-excludability:

Answer 4

not desirable to prevent people from consuming the good as long as the consumer receives some benefit from consuming the good. People can consume the same good (or bad) at the same time

Question 5

Private good:

Answer 5

• Purchase entitles property rights
• Consumption of a private good reduces amount available for others (rivalry)
• Can exclude others from consuming it (excludability)

Question 6

Characteristics of most private goods:

Answer 6

• Rivalry in consumption
• Excludable
• Transferrable
• Low information costs
• Many producers and many consumers

Question 7

Pure Public Goods:

Answer 7

• Cannot exclude others from using it (jointness of supply)
• Consumption by one person does not deplete consumption by others
Examples include national defence, police, lighthouses

Question 8

Quasi-Public Goods

Answer 8

• Non-rival up to a point, until congestion occurs

* Can exclude others

Question 9

A free-rider is a

Answer 9

person who receives the benefit of a good but avoids paying for it:
• Once a public good is produced, it does not cost anything for others to enjoy it; others can’t be excluded from the benefits of the public good
• Hence, consumers will have an incentive to “free ride”

Question 10

Why are public goods an example of market failure?

Answer 10

• Pure public goods may not be provided at all by a competitive market
• Pure public goods may be provided but not in a sufficient quantity

Question 11

Four Categories of Goods:

Answer 11

Private goods: Are both excludable and rival
Public goods: Are neither excludable nor rival
Common resource: Are rival but not excludable
Natural monopolies: Are excludable but not rival