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Chapter 11

Chapter 11 EC120.docx

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Department
Economics
Course
EC120
Professor
Peter Sinclair
Semester
Fall

Description
EC120 Chapter 11: Public Goods and Common Resources Week 11 Introduction -“The Best things in life are free”. Nature provides some of them, such as rivers, mountains, beaches, lakes, and oceans. The government provides other, such as playgrounds, parks, and parades -In each case, people do not pay a fee when they choose to enjoy the benefit of the good -When goods are available free of charge, the market forces that normally allocate resources in our economy are absent -When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in proper amounts. The Different Kinds of Goods -Buyers and sellers in a market typically do not take account of the external effects of their decisions. -In thinking about the various goods in the economy, it is useful to group them according to two characteristics: 1. Is the good excludable? Can people be prevented from using the good? -Excludability-the property of a good whereby a person can be prevented from using it 2. Is the good a rival in consumption? Does one person’s use of the good diminish another person’s ability to us it? -Rival in Consumption-the property of a good whereby one person’s use diminished other people’s use -Goods are then divided into four categories: 1. Private Goods-goods that are both excludable and rival in consumption. For example ice cream cones. It is excludable because you can prevent someone from eating it. It is a rival in consumption because if one person’s eating it, another person cannot as well 2. Public Goods-goods that are neither excludable nor rival. For example, national defence. When a country is attacked it must defend so you cannot prevent it. When one person is enjoying the benefit of it, it does not reduce anyone else’s benefit 3. Common Resources-goods that are rival but not excludable. For example, fish in the ocean. When one person catches a fish, there is next for the next person to catch, but due to the size of the ocean you cannot stop people from fishing 4. Natural Monopoly-excludable, but not a rival in consumption. For example, fire prevention in a small town. It is easy for the firemen to let the house burn, and preventing one house from burning does not take away from other houses -The boundary between the categories is often fuzzy -We examine public goods and common resources because people cannot be prevented from using these goods -For these types of goods, externalities arise because something of value has no price attached to it -Because of external effects, private decisions about consumption and production can lead to an EC120 Chapter 11: Public Goods and Common Resources Week 11 inefficient allocation of resources, and government intervention can potentially raise economic well- being Public Goods -Not excludable and not a rival in consumption The Free-Rider Program -a free rider is a person who receives the benefit of a good but avoids paying for it. -Ex. fireworks. People have an incentive to be free riders rather than ticket buyers, the market would fail to produce an efficient outcome. -If an entrepreneur put on the fireworks display, they would confer an external benefit on those who saw the display without paying for it. When deciding to put on the display, they ignore the external benefits -Because public goods are not excludable, the free-rider problem prevents the private market from supplying them Some Important Public Goods There are many public goods. Here are the three most important: National Defence -Once the country is defended, it is impossible to prevent any single person from enjoying the benefit of this defence, which makes in nonexcludable. -When one person enjoys it, it does not take away from anyone else -National defence is run by the federal government in Canada -People disagree as to the amount spent on national defence, but almost no one doubts that some government spending for national defence is necessary Basic Research -Kno
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