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Chapter 11 Public Goods and Common Resources

THE DIFFERENT KINDS OF GOODS We can divide goods into 4 different kinds: private goods, public goods, common resources, and natural monopolies. To distinguish each goods, we need to answer two questions. -Is the good excludable? Can people be prevented from using the good? -Is the good rival in consumption? Does one person’s use of the good reduce another person’s ability to use it?

If goods are excludable and are rival in consumption, like ice cream, then they are private goods. If goods are not excludable and are not rival in consumption, like tornado siren, then they are public goods. If goods are rival in consumption and are not excludable, like fish in the ocean, then they are common resources. If goods are excludable and are not rival in consumption, like fire protection, then they are natural monopolies. Unfortunately, the separation of goods into these 4 types are sometimes difficult because the boundary between each categories are fuzzy.

PUBLIC GOODS

The Free-Rider Problem In the private market, sometimes there may be the free-rider problem. Free rider is a person who receives the benefit of a good but does not pay for it. Since people would rather be free riders than pay for it, the market would eventually fail. This problem arises because the good is actually public good. The solution for the problem is obviously making the good into public goods. The government can sponsor the production so that everyone is satisfied in the market.

Important Public Goods One of the important public goods is national defense. Once national defense is established, no one can be excluded from enjoying the benefit. Also, when one person enjoys the national defense, it does not reduce the benefit of others. National defense is also one of the most expensive public goods. Other important public goods include basic research and fighting poverty.

National defense is one important example of public goods.

The Difficult Job of Cost-Benefit Analysis When government provides public goods, it should conduct a cost-benefit analysis to estimate the total costs and benefits of the public goods to society as a whole. However, it is very tough job to decide the value of public goods. Highway, for example. Deciding how much highway values is not a easy task. Therefore, the efficient provision of public goods is more difficult than that of private goods.

COMMON RESOURCES

Common resources create one major problem, and it can be explained by the parable called Tragedy of the Commons. Because people are not charged for the use of common resources, they end up using them excessively. To prevent this from happening, government has to limit the use of common resources. Some of the important common resources include clean air and water, congested roads, fish, whales, and other wildlife.

 Whale is one of the important common resources.

Summary - There are 4 types of goods; private goods, public goods, common resources, and natural monopolies. -We distinguish goods by whether they are excludable or not and whether they are rival in consumption or not. -Public goods are neither excludable nor rival in consumption. -Common resources are rival in consumption but not excludable.

Key Terms excludability- the property of a good that decides whether a person can be prevented from using it rival in consumption- the property of a good that decides whether one person's use decreases other people's use or not private goods- goods that are both excludable and rival in consumption public goods- goods that are neither excludable nor rival in consumption common resources- goods that are rival in consumption but not excludable free rider- a person who gets the benefit of a good without paying for it cost-benefit analysis- an analysis of the costs and benefits of providing public goods Tragedy of the Commons- a parable that explains why common resources are overused.