ECON 1 Lecture Notes - Lecture 10: Overconsumption, Federal Communications Commission, Overgrazing
29 May 2018
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ECON 1: Chapter 11 Notes
Focus Questions:
• What are public goods?
What are common resources?
• Why do markets generally fail to provide the efficient amounts of these goods?
• How might the government improve market outcomes in the case of public goods or common resources?
Introduction
• We consume many goods without paying: parks, national defense, clean air & water.
• When goods have no prices, the market forces that normally allocate resources are absent.
• The private market may fail to provide the socially efficient quantity of such goods.
• One of the Ten Principles from Chapter 1:
Governments can sometimes improve market outcomes.
Important Characteristics of Goods
• A good is excludable if a person can be prevented from using it.
o Excludable: fish tacos, wireless Internet access
o Not excludable: FM radio signals, national defense
• A good is rival in consumption if one person’s use of it diminishes others’ use.
o Rival: fish tacos
o Not rival: An MP3 file of Kanye West’s latest single
The Different Kinds of Goods
• Private goods: excludable, rival in consumption
o Example: food
• Public goods: not excludable, not rival
o Example: national defense
• Common resources: rival but not excludable
o Example: fish in the ocean
• Club goods: excludable but not rival
o Example: cable TV
The Different Kinds of Goods
• This chapter focuses on public goods and common resources.
• For both, externalities arise because something of value has no price attached to it.
• So, private decisions about consumption and production can lead to an inefficient outcome.
• Public policy can potentially raise economic
well-being.
Public Goods
• Public goods are difficult for private markets to provide because of the free-rider problem.
• Free rider: a person who receives the benefit of a good but avoids paying for it
o If good is not excludable, people have incentive to be free riders, because firms cannot prevent
non-payers from consuming the good.
• Result: The good is not produced, even if buyers collectively value the good higher than the cost of
providing it.
Document Summary
Some important public goods: national defense, knowledge created through basic research, fighting poverty. Allowing one"s flock to graze on the common land reduces its quality for other families: people neglect this external cost, resulting in overuse of the land. Policy options to prevent overconsumption of common resources: regulate use of the resource. Impose a corrective tax to internalize the externality: example: hunting & fishing licenses, entrance fees for congested national parks, auction off permits allowing use of the resource, example: spectrum auctions by the u. s. federal communications commission. If the resource is land, convert to a private good by dividing and selling parcels to individuals. Some important common resources: clean air and water, congested roads, fish, whales, and other wildlife, natural ecosystems. Conclusion: public goods tend to be under-provided, while common resources tend to be over-consumed, these problems arise because property rights are not well-established, nobody owns the air, so no one can charge polluters.
