CHAPTER+11-+PUBLIC+GOODS+AND+COMMON+RESOURCES

=Chapter 11= =Public Goods and Common Resources=

When we think about the various goods in the economy, it is good to group them into 2 characteristics
1) Is the good **//excludable//**? 2) Is the good //**rival in consumption**//?


 * 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

Under the 2 characteristics, we can classify goods into four categories.

 * Private goods**: goods that are both excludable and rival in consumption
 * Public goods**: goods that are neither excludable not rival in consumption
 * Natural monopoly**: goods that are excludable but not rival in consumption
 * Common resources**: goods that are rival in consumption but not excludable



^- Catching a fish ^-tornado siren

Public goods and the Free-Rider problem
Public goods and common resources are closely related to the study of externalities.

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Since a public good is neither rival in consumption nor excludable, it is difficult to be produced privately. Once it is produced, it is difficult to exclude them since the public can gain benefit without paying. Therefore, some would try to take a //**free-ride, something you did not pay for using.**//=====

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A **//free-rider is a person who receives the benefit of a good but avoids paying for it.//** Therefore, the free-rider problem prevents the private market from supplying efficient amounts of public goods.=====

In order to solve the free-ride problem,
1) the government can decide to provide the public good if the total benefit exceeds the cost. 2) the government can make everyone better off by providing the public food and paying for it through tax revenue. (imposing tax to pay for public goods)

Important Public Goods
The defense of a country from foreign aggressors is a classic example of a public good. once the country is defended, it is impossible to prevent any single person from enjoying the benefit of this defense. General knowledge is a public good. Once a theorem is proved, the knowledge is not excludable. However, specific knowledge can be restricted under copyright laws. Attempting to eliminate poverty through private charity will not work. However, by taxing the wealthy to raise the living standards of the poor can potentially make everyone better off.
 * National Defense**
 * Basic Research**
 * Fighting Poverty**

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In order to decide whether to provide a public good or not, the total benefit of all those who use the good //must be compared to the costs of providing and maintaining the public good//. It is used to estimate the total costs and benefits of the project to society as a whole. **//Cost-benefit analysis is difficult to do because of the absence of prices needed to estimate social benefits and resource costs//**. The value of life, the consumer's time, and the aesthetics are difficult to assess.=====

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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**//. Common resources tend to be used excessively when individuals are not charged for their usage. This relates to a //negative externality.//=====

Some Important Common Resources
1) Clean air and water 2) Congested roads 3) Fish, whales, and other wildlife.

Questions 1) Determine each goods into an appropriate category of goods a. clothing b. fish in the ocean c. cable TV d. tornado siren 2) What is a possible way of solving the free-rider problem?

Answers 1) a. private goods b. common resources c. natural monopolies d. public goods

Sources: Textbook, practice textbooks.