Chapter+11+(Public+Goods+and+Common+Resources)

=Public Goods and Common Resources =

The two definite questions you have to ask to find the different kinds of goods are:

Is the good **excludable**? Is the good **rival in consumption** ?

So how many different kinds of Goods are there?

There are 4!

Private goods, public goods, common resources, and natural monopolies. ===Private goods are goods that are both excludable, prevented from using the good, and rival in consumption, one person's use of the good reduces another person's ability to use it. === 

 Public goods are goods that are neither excludable nor rival in consumption.


 Common resources / Commons Goods are goods that are rival in consumption but not excludable


 Natural monopolies / Low-congestion Goods are goods that are excludable but not rival in consumption.


In public goods, there are problem with Free-Rider Problem. So what is a free rider?

Free rider is a peron who receives the benefit of a good but avoids paying for it. Because all people has an incentive to be a free rider, I mean who doesn't want things for free?, the maket will fail to provide the efficient outcome (if we have too many).

Some important public goods are National Defense, Basic research , and fighting poverty.

Lets go deeper into these public goods, shall we?  National Defense  : The defense of a country from foreign aggressors is a classic example. If we defend the country, it is hard to not defend that one person in the country. So the whole thing, in this case, the country, can benefit. Basic Research : Knowledge is created through research. And by having the research and new knowledge, the people who know the knowledge can benefit. Once we know the cure for a disease, not just one person, but the whole nation, world can benefit from knowing that knowledge. <span style="display: block; color: rgb(233, 113, 12); text-align: center; font-size: 120%;"> The difficult job of Cost-Benefit Analysis

<span style="display: block; text-align: left; color: rgb(15, 15, 16);">First, What is Cost-Benefit Analysis? Answer: a study that compares the costs and benefit to society of providing a public good.

So what does that really mean? Suppose that the government is considering a public project, such as building a new highway. To judge wether to build a highway, it must compare the total benefit of all those who would use it to the costs of building and maintaining it. To compare the cost and the benefit that it gives to the society, the government will hire bunch of economist to compare the cost and benefit to decide if the government should really build the highway. But you should always remember finding the costs and benefits of public projects are approximations that can be always wrong, which it is most of the time.

<span style="font-size: 110%; color: rgb(209, 16, 16); text-align: center; display: block;">Lets dive deeper into common resources, shall we?

<span style="display: block; font-size: 90%; text-align: left; color: rgb(12, 12, 14);">Common Resources can give us problems, and the <span style="color: rgb(21, 32, 158);">Tragedy of the Commons best explains this:



Once upon a time, there was the town named Donuts. In Donuts, there were sheeps spending much of their time grazing on the town residents land. This land is not owned by family, and all the residents of Donuts are able tograze their sheep on it. So everyone was happy.

As the years past, the population in Donuts grew, and so did the sheep population. With growing number of sheep and fixed amount of land, the land starts to lose its ability to replenish itself. Eventually, the land becomes a barren. With no land, the residents of Donuts cannot raise sheeps, thus making it impossible to have a cotton industry. Many families lose their livelihood.

What causes this tragedy? The reason is because the social and private incentives differ.

The bottom line is that Tragedy of the Commons rise because of an externality.

Some examples of common resources include:


 * Clean Air and Water: Pollution is a negative externality that has a negative impact on the environment. Environment degradation is a modern Tragedy of Commons.
 * Congested Roads: When one person drives the road, the more the road becomes crowded. And then, other people must drive more slowly. In this case, the road is a common resources.
 * Fish, Whales, and other Wildlife: Excessive fishing and hunting animals can destroy commercilly valuable marine population. Thus by fishing and hunting, it makes the animals' population even more reduced.

Questions:

Private goods are: a. both excludable and rival. b. neither excludable nor rival. c. excludable, but not rival.

Answer: A

The free-rider problem refers to the:

a. over exploitation that tends to occur to common resources. b. abuse of power by some firms when they increase their prices to unreasonable levels. c. fact that when public goods are provided by someone, there is no way of preventing others from using them, even if they do not pay for them.

Answer: C

All of the following are examples of public goods, EXCEPT:

a. national defense. b. basic research. c. clean air and water. d. programs to fight poverty.

Answer: C

Sources: The book: Principles of Microeconomics by N. Gregory Mankiw http://livingeconomics.org/images/glossary/excludable_rival_goods2.jpg http://www.garretthardinsociety.org/images/cartoon_commons1.gif <span style="display: block; color: rgb(233, 113, 12); text-align: center; font-size: 120%;"><span style="display: block; text-align: left; color: rgb(15, 15, 16);"><span style="font-size: 110%; color: rgb(209, 16, 16); text-align: center; display: block;"><span style="display: block; font-size: 90%; text-align: left; color: rgb(12, 12, 14);">