Public goods and Common resources CK hapter 11
Public Goods and Common Resources Chapter 11
The best things in life are free Free goods provide a special challenge for economic analySIs o Most goods in our economy are allocated in markets °… for these goods,, prices are the signals that guide the decisions of buyers and sellers When goods are available free of charge the market forces that normally allocate resources in our economy are absent
“The best things in life are free. . .” • Free goods provide a special challenge for economic analysis • Most goods in our economy are allocated in markets… • …for these goods, prices are the signals that guide the decisions of buyers and sellers. • When goods are available free of charge, the market forces that normally allocate resources in our economy are absent
The best things in life are free o When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in the proper amounts e In such cases, government policy can potentially remedy the market failure that results, and raise economic well-being
• When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in the proper amounts. • In such cases, government policy can potentially remedy the market failure that results, and raise economic well-being. “The best things in life are free. .
The different Kinds of goods When thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the good excludable? o Is the good rival?
The Different Kinds of Goods • When thinking about the various goods in the economy, it is useful to group them according to two characteristics: • Is the good excludable? • Is the good rival?
The different Kinds of goods Excludability People can be prevented from enjoying the g ooa Laws recognize and enforce private proper rights ● Rivalness One persons use of the good diminishes another persons enjoyment of it
• Excludability – People can be prevented from enjoying the good. – Laws recognize and enforce private property rights. • Rivalness – One person’s use of the good diminishes another person’s enjoyment of it. The Different Kinds of Goods
Four Types of goods ● Private goods Are both excludable and rival ● Public goods Are neither excludable nor rival Common resources Are rival but not excludable o Natural monopolies Are excludable but not rival
Four Types of Goods • Private Goods – Are both excludable and rival. • Public Goods – Are neither excludable nor rival. • Common Resources – Are rival but not excludable. • Natural Monopolies – Are excludable but not rival
Types of Goods Rival? Y es No Private Goods Natural Monopolies Ice-cream cones Movies Yes Clothing Cable tv Congested toll roads. Uncon gested toll roads Excludable? Common Resources Public Goods No Fish in the ocean National defense The environment Knowledge Congested nontoll. Uncongested nontoll roads roads
Types of Goods Rival? Yes No Yes Private Goods · Ice- cream cones ·Clothing · Congested toll roads Natural Monopolies · Movies ·Cable TV · Uncongested toll roads No Common Resources · Fish in the ocean · The environment · Congested nontoll roads Public Goods · National defense ·Knowledge · Uncongested nontoll roads Excludable?
The Free-Rider problem o A free-rider is a person who receives the benefit of a good but avoids paying for it Since people cannot be excluded from enjoying the benefits of a public good, individuals may withhold paying for the good hoping that others will pay for it The free-rider problem prevents private markets from supplying public goods
The Free-Rider Problem • A free-rider is a person who receives the benefit of a good but avoids paying for it. • Since people cannot be excluded from enjoying the benefits of a public good, individuals may withhold paying for the good hoping that others will pay for it. • The free-rider problem prevents private markets from supplying public goods
Solving the Free-rider problem The government can decide to provide the public good if the total benefits exceed the costs o The government can make everyone better off by providing the public good and paying for it with tax revenue
Solving the Free-rider Problem • The government can decide to provide the public good if the total benefits exceed the costs. • The government can make everyone better off by providing the public good and paying for it with tax revenue
Some Important Public goods ● National defense ● Basic research Programs to Fight poverty
Some Important Public Goods • National Defense • Basic Research • Programs to Fight Poverty