Chapter 11: Public GoodsAnd Common Resources
-Defining characteristics of public goods and common resources
-Examine why private markets fail to provide public goods
-Consider some of the important public goods in our economy
-See why the cost-benefit analysis of public goods is both necessary and difficult
-Examine why people tend to use common resources too much
-Consider some of the important common resources in our economy
The Different Kinds of Goods
Goods have two characteristics
Excludable: Property of a good whereby a person can be prevented from using it.
Rival In Consumption: Property of a good whereby one person's use diminishes other people's use
Divide into four categories
1. Private goods: Goods that are both excludable and rival.
ex: Ice cream cone is excludable because it can prevent someone from eating it: you just don't
give it to him.
Rival in Consumption because if one person eats an ice cream cone another person can't eat the
2. Public goods: neither excludable nor rival in consumption.
ex: national defence is a public good. Defended from foreign aggressors, it is impossible to
prevent any single person from enjoying the benefit of this defence and does not reduce the
benefit to anyone else.
3. Common Resources : Goods that are rival not excludable
ex: fish in the ocean are rival good: When a person catches a fish there are fewer fish for the next
person to catch. Not excludable because ocean is vast, hard to sop fishermen from taking fish
out of it.
4. Natural Monopoly: Good excludable not Rival in Consumption
ex: Fire protection in a small own. (easy to exclude people from using this good: They can
choose to let the houses burn down). Not Rival in Consumption: They wait a long time for houses
on fire, so protecting an extra house is unlikely to reduce the protection of others. Public goods and common resources: goods that are not excludable.
Private Goods Natural Monopolies
Ice cream Cones Cable TV
Uncongested Toll Roads
Congested Toll Roads
Common Resources Public Goods
Fish in the ocean Tornado Siren
The enviro National Defence
Congested Nontoll roads
Uncongested Nontoll Roads
-Common resources and Public Goods= Goods not excludable
-Closely related to the study of externalities.
-Externalities arise because something of value has no price attached to it.
If one person was to provide a public good, other people would be better off :
-They would receive a benefit without paying for it.
-When one person uses a common resource such as fish in the ocean, other people are worse off because
there are fewer fish to catch.
-Suffer a loss but are not compensated for it.
Because of these external effects, private decisions about consumption and production can lead to an
inefficient allocation of resources and gov't intervention can potentially raise economic well being.
-Fireworks display: good is not excludable because it is impossible to prevent someone from seeing
-NOT a rival in consumption because one person's enjoyment of fireworks does not reduce anyone else's
enjoyment of them. Public Vs Private goods
Public Goods: Non rival Non Excludable
Non Rival: One person's Consumption of the product does not diminish someone else's enjoyment of the
Non Excludable: You cannot bar someone else from using the product.
Public Goods: National Defense, fireworks display, park, public road.
Problem with public goods: Often under produced or not produced at all; Free- rider problem or they are
Often gov't collects taxes and pay for these public goods.
The Free Rider Problem
-Aperson who receives the benefit of a good but avoids paying for it.
-This a market failure because it occurs from an externality.
-Fail to produce an efficient outcome
-Because public goods are not excludable, the free rider prevents the private market form supplying them.
Govt' can remedy the problem:
If total benefits exceed costs: gov't can provide public good and pay for it with