CHAPTER+11+.+PUBLIC+GOODS+AND+COMMON+RESOURCES+;)

=Chapter 11: Public Goods and Common Resources = = = 

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=Introduction: = = =

 In this chapter we will learn about both the differences in Public Goods and Common Resourses, along with the faults and benefits of both subjects.

But first we need to understand the 4 different types of goods. They are Private Goods, Public Goods, Common Resources, and Natural Monopolies. They are divided through 2 different factors, Excludability and rivalry in consumption.

Excludability is if a good can be prevented from using from a certain person, group, etc

Rivalry in consumption is whether the property of the good diminishes after each use.

 = **Private Goods:** = = =  Private Goods are both excludable and rival in consumption. These are goods that can be prevented from spreading out to other people (through selected distribution or selling them), and only tend to benefit the one using the good, and lowers the amount of goods that others can use.

 = **Public Goods:** = = =  Public Goods are neither excludable nor rivals on consumption, These goods are free for everyone to use and also benefit everyone at the same time

 =<span style="font-family: 'Comic Sans MS',cursive;"> **Common Resources:** = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> These are goods that are not excludable but still rivals in consumption. These goods are free for everyone, but it still only benefits a certain group with the good and is limited in supply.

<span style="font-family: 'Comic Sans MS',cursive;"> =<span style="font-family: 'Comic Sans MS',cursive;"> **Natural monopolies:** = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> Natural Monopolies are excludable but not rival in consumption. These goods can be blocked for others and prevented but it does not lower another ability to use it

This can be easily seen by the chart below



Now we need to come to understand what problems come from the usage of Public Goods. =<span style="font-family: 'Comic Sans MS',cursive;"> **The Free Rider Problem:** = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> A free rider is a person who gains the benefit of a good but does not have to pay for that certain good. This creates a problem since, public goods, being non-excludable, can not stop a person from enjoying the good even if they had not paid. Thus, the good fails to create an efficient outcome and there is no one to pay and support the good in the first place. For most cases, this is solved through government intervention, where the government uses tax revenue to support the public good,

media type="youtube" key="GCdfVQgmvV0" height="344" width="425"

So the government usually has to step in for the private market on its own can not produce an efficient quantity. But the government can not just make a decision just randomly. Instead, they have to come to a decision through a study called cost-benefit analysis.

<span style="font-family: 'Comic Sans MS',cursive;"> =<span style="font-family: 'Comic Sans MS',cursive;"> **Cost Benefit Analysis:** = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> Cost benefit analysis is a study that compares te costs and benefits to a society of providing a public good. Simply, its a study to make sure that the good they are providing is worth their time. However, it is not simple. Because the good will be available free of charge, it is difficult to understand the true benefits of the good. One can not simply ask a person either since people have little incentive to actually tell the truth. Thus, people who don't like a certain good will be against it while those who seek that certain good will be for it. Thus the best solution is through revealing the value of the good to pay and the sellers reveal their costs they are willing to accept. Once they find an equilibrium, they use those approximations to create or back up that certain good.

Now Common resources have a different problem. As said before, they are not excludable like Public Goods, but are rival in consumption. Thus if one person uses it, it is less for the other people to use. This creates the problem where policymakers have to be concerned with how much of the good is being used. This is called The Tragedy of the Commons.

<span style="font-family: 'Comic Sans MS',cursive;"> =<span style="font-family: 'Comic Sans MS',cursive;"> **Tragedy of the Commons:** = =<span style="font-family: 'Comic Sans MS',cursive;"> = <span style="font-family: 'Comic Sans MS',cursive;"> The Tradegy of the Commons is a parable that illustrates why common resources get used more than is desirable form the standpoint of society as a whole. Basically, the problem is that though its a good that is non-excludable, the good can easily run out. Along with the fact that since each person only takes up a small part of that finite amount of good, nobody has an incentive to stop using the good. Thus the amount of good runs out. To solve this problem, the solution is yet again government support. People would need to either start creating taxes, or permits to use the good. Or it can divide up the amount of goods so that each person can only use a certain amount. However, this would be the governements actions to turn a common resource into a private good.

So these 2 goods, Public goods and Common Resources, shows yet again that the market does not always adequately divide or provide goods. Markets can not ensure that certain goods are kept in good standing due to the lack of incentives for people to use. Thus government support is important to create a more efficient and thus create an economic well-being.

=<span style="font-family: 'Comic Sans MS',cursive;"> Key Terms/Concepts that you need to know = <span style="font-family: 'Comic Sans MS',cursive;"> **-excludibility:** the property of a good whereby a person can be prevented from using it <span style="font-family: 'Comic Sans MS',cursive;"> Picture Links: http://johnleanomics.files.wordpress.com/2009/03/image5.png http://opus1journal.org/images/glossary/excludable_rival_goods2.jpg
 * -rivalry in consumption:** the property of a good whereby one person's use diminishes other people's use
 * -private goods:** goods that are both excludable and rival in consumption
 * -public goods:** goods that are neiher excludable nor rival in consumption
 * -common resources:** goods that are rival in consumption but not excludable
 * -free rider:** a person who recieves the benefit of a good but avoids paying for it
 * -cost-benefit analysis:** a study that compares the costs and benefits to society of providing a public good
 * -Tragedy of the Commons** : a parable that illustrates why common resources get used more than is deisreable from the standpoint of society as a whole.