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Chapter 11

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Economics 10a
Gregory Mankiw

Chapter 11 Economics: Public Goods and Common Resources • Excludability: the property of a good whereby a person can be prevented from using it • Rivalry in consumption: the property of a good whereby one person’s use diminishes other people’s use • Private goods: goods that are both excludable and rival in consumption o Most goods are private goods o You don’t get it unless you pay for it, and once you have it, you are the only person who benefits • Public goods: goods that are neither excludable nor rival in consumption o People cannot be prevented from using a public good, and one person’s use of a public good does not reduce another person’s ability to use it • Common resources: goods that are rival in consumption but not excludable • Club goods: goods that are excludable but not rival in consumption • Whether goods are excludable or rival in consumption is often a matter of degree • Common resources and public goods: both are not excludable, which causes externalities to arise because they are available to everyone for free • Private decisions about consumption and production can lead to an inefficient allocation of resources, and government intervention can potentially raise economic well-being • Free rider: a person who receives the benefit of a good but avoids paying for it o Afree-rider problem arises when the number of beneficiaries is large and exclusion of any one of them is impossible o People have incentive to be free riders, creating market inefficiency o The free rider problem prevents the private market from supply non-excludable goods o If the government decides that the total benefits of a public good exceed its costs, it can provide the public good, pay for it with tax revenue, and make everyone better off • Important Public Goods: o National defense o Basic research: general knowledge is a public good  Specific technological knowledge is patented, making the knowledge discovered by the owner of the patent excludable  The government subsidizes basic research in medicine, mathematics, physics, chemistry, biology, and even economics  Because Congress and agency bureaucrats determine who gets research funding, there is no guarantee that the public sector correctly pays for the right amount and right kinds of research o Fighting poverty: the welfare system, food stamp program, and Medicaid are all government services designed to help the poor  Advocates of antipoverty programs claim that fighting poverty is a public good  Even though everyone prefers to live in a society without poverty, fighting poverty is not a good that private actions can provide because of the free rider problem • It is not rival in consumption meaning that people will ultimately let others take the initiative and let themselves enjoy the benefits  This means that eliminating poverty through private charity will probably not work; government action in taxing the wealthy to raise the living standards of the poor can make everyone better offthe poor have a higher standard of living and rich will enjoy living in a society with little poverty • Lighthouses are an example of a good that could be private or public o They are usually operated by the government for the public use by ship captains o It can be a private good if the owner of a nearby port pays the lighthouse for its services, rendering that port serviceable to ships • Cost-benefit analysis: a study that comp
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