Chapter+11+PBs+and+CRs+Linds

=Lecture 11: = = More missing markets =

__ Lecture Overview __ • Different kinds of goods • Rivalry and excludability • Public goods • The free-rider problem • Common resources • The Tragedy of the Commons =DEFINE KEY CONCEPTS=
 * 1) Excludability: Can you prevent someone else from using the good?
 * 2) Rivalry in consumption: Will the good diminish?
 * 3) Private goods: excludable and rival in consupmtion.
 * 4) Public goods: not excludable and not rival in consumption.
 * 5) Common resources: rival in consumption but not excludable.
 * 6) Free rider: Person who receives benefit without paying the cost of it.
 * 7) Cost-benefit analysis: Analyzing the cost and benefit to society of providing public good.
 * 8) Tragedy of the Commons: This explains why common resources get used more than other goods.

 __Started the current topic with Economic Principle #6: __  • Markets are usually a good way to organize activity 

However, in Lecture 10 we saw that • Externalities arise from missing markets • Internalise by completing market __**(i) private solutions where transactions costs are low (ii) public solutions where transactions costs are high**__

With (ii) we see the importance of Economic Principle #7: • Governments can sometimes improve market outcomes

Now, if we consider cases where a good or service does not have a price attached to it, but is valuable to us

As we saw in Lecture 10, where there is no price private markets cannot ensure that the good/service is produced and consumed in the proper amounts Different kinds of goods

=There are two characteristics that we use to classify goods:= 1. Is the good excludable? Can people be prevented from using it? 2. Is the good rival? Does one person’s use of the good diminish another person’s ability to use it?



||~ Yes ||~ No ||
 * ||||~ Excludable(DIMINISH?): ||
 * 
 * ~ Excludable (PREVENT): Yes || <span style="font-size: 120%; color: rgb(255, 46, 85);">Private Goods

|| <span style="color: rgb(0, 19, 235);"><span style="font-family: Georgia,serif;">Natural Monopolies
 * Icecream
 * Clothing
 * Congested toll roads

||
 * Fire protection
 * Cable TV
 * Uncongested toll roads
 * ~ <span style="font-family: Georgia,serif;">Excludable (PREVENT): <span style="font-family: Georgia,serif;">No || <span style="font-family: Georgia,serif;"><span style="color: rgb(26, 179, 0);">Common Resources

|| <span style="color: rgb(219, 146, 0);"><span style="font-family: Georgia,serif;">Public Goods
 * Fish in the ocean
 * Environment
 * Congested NONTOLL roads


 * Tornado siren
 * National Defense
 * Uncongested nontoll roads ||

=<span style="font-size: 130%; color: rgb(255, 31, 31);">Private goods – assumption up till now= media type="youtube" key="QP5VkW2gKLk" height="344" width="425" media of students applying private goods to real life. =<span style="font-size: 120%; color: rgb(6, 0, 204);">Natural monopolies – e.g. fire service= <span style="font-family: 'Comic Sans MS',cursive;">• Excludable in that service can be refused • But non-rival in that additional cost one more unit of service is small once initial outlay is made • S2

=Here focus on goods that are not excludable= <span style="font-family: 'Lucida Console',Monaco,monospace;">• Common resources – not excludable but rival • Public goods – neither excludable nor rival

=For both of these, externalities arise because something of value has no price attached to it= <span style="font-family: Tahoma,Geneva,sans-serif;"> • The feature of non-excludability means that if one person provides the good other people cannot be prevented from benefiting from it

<span style="font-family: Georgia,serif;"><span style="font-size: 140%; color: rgb(254, 11, 11);">However, the distinction between public goods and common resources arises • if one person’s consumption means that other people are worse off • and they are not compensated for this loss

• The environment? • Natural resources?
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">If this is the case – i.e. consumption is rival - the good is a common resource, e.g. **<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

However, if consumption is non-rival, we have a public good, e.g. • National defence • Air-raid warnings • Fireworks display? • National parks? • Lecture notes on the web?

<span style="font-family: 'Comic Sans MS',cursive; color: rgb(255, 36, 36);">Public goods and the free-rider problem A free rider is “a person who receives the benefit of a good but avoids paying for it” (Mankiw p226)

<span style="font-family: Georgia,serif; color: rgb(0, 0, 0);">Ex) Watching the fireworks even though you haven't paid for it.

A public good is socially desirable (it has external benefits) but is likely not to be privately profitable

• private costs exceed private benefits
 * __The free-rider problem prevents markets from producing public goods__**

However, government can potentially remedy if it decides that the total (social) benefits exceed the costs (use of cost-benefit analysis). It overcomes the free-rider problem by coercing people to pay through the tax system

=<span style="font-size: 120%; color: rgb(0, 224, 29);"> Common resources =

<span style="font-size: 80%; color: rgb(0, 0, 0);"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; color: rgb(227, 89, 248);"><span style="color: rgb(0, 0, 0);">Like public goods, common resources are not excludable.

However, they are rival • One person’s use of a common resource reduces other people’s ability to use it

So, once the good is provided, policymakers need to be concerned about how much is used

=<span style="font-size: 80%; color: rgb(0, 0, 0);"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; color: rgb(227, 89, 248);"><span style="color: rgb(0, 0, 0);"> __**The Tragedy of the Commons**__  = =<span style="font-size: 80%; color: rgb(0, 0, 0);"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; color: rgb(227, 89, 248);"><span style="color: rgb(0, 0, 0);">  = <span style="font-size: 80%; color: rgb(0, 0, 0);"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; color: rgb(227, 89, 248);"><span style="color: rgb(0, 0, 0);"> • “a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole” (Mankiw p231) • The Scottish philosopher David Hume

media type="youtube" key="09nwr01UPXQ" height="344" width="425" The Tragedy of the Commons is drawn from the famous article by renowned biologist Garrett Hardin. The film begins with a historical example of farmers sharing their benefits—but not the responsibilities — of common pasture lands. This encompassing film studies the distribution of resources, the clash of personal values, and a variety of possible outcomes and solutions. Endorsed by and produced in conjunction with Biological Sciences Curriculum Study. Credits to [| phoenixfilmandvideo]

<span style="font-size: 80%; color: rgb(0, 0, 0);"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; color: rgb(227, 89, 248);"><span style="color: rgb(0, 0, 0);"> Why the environment may be classed as a common resource rather than a public good • Global warming (leading to the Kyoto Protocol)

Also things like over-fishing, over-grazing public land, over-littering

=<span style="font-size: 80%; color: rgb(0, 0, 0);"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; color: rgb(227, 89, 248);"><span style="color: rgb(0, 0, 0);"> Problem? = =<span style="font-size: 80%; color: rgb(0, 0, 0);"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; color: rgb(227, 89, 248);"><span style="color: rgb(0, 0, 0);">  = <span style="font-size: 80%; color: rgb(0, 0, 0);"><span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 120%; color: rgb(227, 89, 248);"><span style="color: rgb(0, 0, 0);"> • Social and private incentives differ

Essentially, the Tragedy of the Commons arises because of a negative externality

While the characteristic of non-excludability leads to a positive external benefit, if a good is rival this means there is an external cost

The negative externality can be internalised by regulating the consumption/use of the resource by each group or individual • may involve taxes Or by dividing the resource between different users – assigning property rights (turn common resources into private goods) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">However, they are rival • One person’s use of a common resource reduces other people’s ability to use it

So, once the good is provided, policymakers need to be concerned about how much is used

=<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> The Tragedy if the Commons = =<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> = <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> • “a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole” (Mankiw p231) • The Scottish philosopher David Hume

Why the environment may be classed as a common resource rather than a public good • Global warming (leading to the Kyoto Protocol). Also things like over-fishing, over-grazing public land, over-littering

Problem? • Social and private incentives differ

Essentially, the Tragedy of the Commons arises because of a negative externality. While the characteristic of non-excludability leads to a positive external benefit, if a good is rival this means there is an external cost

The negative externality can be internalised by regulating the consumption/use of the resource by each group or individual • may involve taxes

Or by dividing the resource between different users – assigning property rights (turn common resources into private goods)

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> E.g. Roads • If a road is not congested, use is not rival, so the road is a public good • If a road is congested, use of the road yields a negative externality, and drivers’ use of the road is affected by the use of others • Under these circumstances the road is a common resource

The environment as a whole may be regarded by some as a public good but as a common resource by others.

Determine using rivalry and excludability!

National parks are so large, that the marginal cost of an additional visitor must be very low – so non-rival – and open to everyone – so non-excludable • a public good media type="youtube" key="IArvYQOE39Q" height="344" width="425" Example of a Public good. [|Credits to 7ololade7]

=BRIEF SUMMARY= Goods differ in whether they are excludable and whether they are rival in consumption. If the goods are excludable, it is possible to prevent others from using the goods that you're using. If the good is rival in consumption, it reduces other people's ability to use the same unit of good. (See the table above to see the four different types of goods).

Lindsay, I'm not sure if you're 100% done with this chapter, I'll add some media, graphs, and summary, so add things if you have to cuz I don't think this is how the chapter ends, and add more details not just bullet points :) Please follow the rubric. summary of each chapter 3 media 2-3 questions answers all keyterms 2 well labeled charts or graphs