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Chapter 11.docx

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David Gray

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 same one. 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. Because: Figure 11.1 Private Goods Natural Monopolies Fire Protection Ice cream Cones Cable TV Uncongested Toll Roads Clothing Congested Toll Roads Common Resources Public Goods Fish in the ocean Tornado Siren The enviro National Defence Congested Nontoll roads Uncongested Nontoll Roads Additional Notes: -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. ex: Positive externality: If one person was to provide a public good, other people would be better off : -They would receive a benefit without paying for it. Negative Externality: -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. Public Goods -Fireworks display: good is not excludable because it is impossible to prevent someone from seeing fireworks -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 product. 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 overused. 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
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