ECO101H1 Chapter Notes - Chapter 11: Natural Monopoly

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Published on 14 Mar 2016
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The Different Kinds of Goods
1. Is the good excludable? Can people be prevented from using the good?
2. Is the good rival in consumption? Does one person’s use of the goods diminish
another person’s ability to use it?
Goods are divided into four categories:
1. Private goods are both excludable and rival in consumption
2. Public goods are neither excludable nor rival in consumption
3. Common resources are rival in consumption but not excludable
4. When a good is excludable but not rival in consumption, it is an example of a natural
monopoly
Public Goods
The Free-Rider Problem
A free rider is a person who receives the benefit of a good but avoids paying for it
Some Important Public Goods
National defence
Basic research
Fighting poverty
The Difficult Job of Cost-Benefit Analysis
The government provides public goods because the private market on its own will not
produce an efficient quantity
A cost-benefit analysis is a study that compares the costs and benefits to society of
providing a public good
Common Resources
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
Some Important Common Resources
Clean air and water
Congested roads
Fish, whales, and other wildlife
Summary
Goods differ in whether they are excludable and whether they are rival in
consumption. A good is excludable if it is possible to prevent someone from using
it. A good is rival in consumption if one person’s use of the good reduces other
people’s ability to use the same unit of the good. Markets work best for private
goods, which are both excludable and rival in consumption. Markets do not work
as well for other types of goods
Public goods are neither rival in consumption nor excludable. Examples of public
goods include fireworks displays, national defence, and the creation of
fundamental knowledge. Because people are not charged for their use of the
public good, they have an incentive to free-ride when the good is provided
privately. Therefore, governments provide public goods, making their decision
about the quantity based on cost-benefit analysis
Common resources are rival in consumption but no excludable. Examples include
common grazing land, clean air, and congested roads. Because people are not
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Document Summary

A free rider is a person who receives the benefit of a good but avoids paying for it. The government provides public goods because the private market on its own will not produce an efficient quantity. A cost-benefit analysis is a study that compares the costs and benefits to society of providing a public good. 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. Goods differ in whether they are excludable and whether they are rival in consumption. A good is excludable if it is possible to prevent someone from using it. A good is rival in consumption if one person"s use of the good reduces other people"s ability to use the same unit of the good. Markets work best for private goods, which are both excludable and rival in consumption. Markets do not work as well for other types of goods.

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