Chapter 11: Public Goods and Common Resources: Excludability, Rivalry, and Market Outcomes

Public Goods and Common Resources

Introduction

Many goods in society are consumed without direct payment, such as parks, clean air, and mountains. These goods often lack market prices, so the usual market mechanisms for allocating resources do not function. As a result, private markets may fail to provide these goods efficiently, and government intervention can sometimes improve outcomes.

Characteristics of Goods

Excludability

• Excludability refers to whether people can be prevented from using a good.

• Excludable goods: Access can be restricted (e.g., fish in a private pond, tacos).

• Non-excludable goods: Access cannot be restricted (e.g., fish in the international ocean, national defense).

Rivalry in Consumption

• Rivalry in consumption means one person's use of a good reduces another person's ability to use it.

• Rival goods: Consumption by one diminishes availability for others (e.g., tacos, laptop computers).

• Non-rival goods: Consumption by one does not affect others (e.g., uncongested road).

The Different Kinds of Goods

Goods can be classified based on excludability and rivalry:

Type of Good	Excludable?	Rival?	Example
Private Goods	Yes	Yes	Pizza
Public Goods	No	No	National defense
Common Resources	No	Yes	Fish in international waters
Club Goods	Yes	No	Netflix

Example: Classification of Goods

• Fish in private pond: rival, excludable (private good)

• Fish in the ocean: rival, not excludable (common resource)

• Research on patented drug: not rival, excludable (club good)

• Basic research on lifestyle: not rival, not excludable (public good)

Case Study: Roads as Goods

• Uncongested non-toll road: Public good

• Uncongested toll road: Club good

• Congested non-toll road: Common resource

• Congested toll road: Private good

Public Goods and Free Riders

Free Rider Problem

• Free rider: A person who receives the benefit of a good but avoids paying for it.

• Public goods are not excludable, so people have an incentive to be free riders.

• This leads to market failure, as private markets cannot efficiently supply these goods.

Example: Neighborhood Fountain

• 200 neighbors each value a fountain at $100; cost to build is $7,000.

• Total benefit: $20,000 > cost, but only $3,000 is collected due to free riding.

• Government can solve by taxing each neighbor $35 to fund the fountain.

Government Solutions for Public Goods

• If total benefits exceed costs, the government can provide the public good and fund it through taxation.

• This can make everyone better off, but measuring the benefit is often difficult.

Important Public Goods

• National defense: Expensive and universally recognized as a public good.

• Basic research: Subsidized by government; benefits are hard to measure.

• Fighting poverty: Programs like TANF, SNAP, and EITC provide income support and food subsidies.

Cost-Benefit Analysis

• Cost-benefit analysis: Compares the costs and benefits to society of providing a public good.

• Estimates are rough due to lack of price signals.

• Government must decide both the type and quantity of public goods to provide.

Common Resources

Characteristics

• Not excludable: Cannot prevent free riders from using them.

• Rival in consumption: One person's use reduces availability for others.

• Government's role: Ensure provision and prevent overuse.

The Tragedy of the Commons

• Parable illustrating overuse of common resources due to misaligned private and social incentives.

• Example: Overgrazing on common land leads to depletion of grass and inability to raise sheep.

• Negative externality: Individual use imposes costs on others, leading to overuse.

Possible Solutions

• Regulate usage (e.g., limit number of sheep per family).

• Internalize externality (e.g., tax usage).

• Auction permits for usage rights.

• Privatize the resource (divide land among families).

Important Common Resources

• Clean air and water: Suffer from pollution (negative externality); addressed by regulation or taxes.

• Congested roads: Suffer from congestion; addressed by tolls or congestion pricing.

• Fish, whales, and wildlife: Overfishing and hunting require international cooperation, licenses, and quotas.

Congestion Pricing

Economists widely agree that congestion charges (e.g., higher tolls during peak times) can improve efficiency in transportation networks and allow for lower taxes elsewhere.

Property Rights and Government Action

• Market failure occurs when valuable resources lack well-defined property rights.

• Government can help by defining property rights, regulating behavior, or supplying goods using tax revenue.

Summary Table: Types of Goods

Type	Excludable?	Rival?	Market Outcome
Private Good	Yes	Yes	Efficiently provided by market
Public Good	No	No	Underprovided; government provision needed
Common Resource	No	Yes	Overused; regulation/taxation needed
Club Good	Yes	No	Efficiently provided with fees

Key Terms and Concepts

• Excludability: Ability to prevent non-payers from using a good.

• Rivalry in consumption: One person's use diminishes another's.

• Free rider: Someone who benefits without paying.

• Tragedy of the commons: Overuse of a common resource due to lack of property rights.

• Cost-benefit analysis: Tool for evaluating public projects.

Formulas

• Total Benefit of Public Good:

$\text{Total Benefit} = \text{Number of Users} \times \text{Value per User}$

• Net Benefit:

$\text{Net Benefit} = \text{Total Benefit} - \text{Total Cost}$

Summary

• Goods differ in excludability and rivalry, affecting how markets allocate them.

• Public goods and common resources are subject to market failures due to free riders and overuse.

• Government intervention, through provision, regulation, or taxation, can improve outcomes.