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Public Goods and Common Resources. This chapter deals with problems that arise for the allocation of resources when there are goods without market prices. This is very closely related to on of the Ten Principles of Economics: Governments can sometimes improve market outcomes.

Goods can be grouped into four categories based on two questions. Is is excludable? Is the good rival in consumption? If a good is excludable, people can be prevented from using the good. If a good is rival in consumption, one person's use of the good reduce another person's ability to use it. Examples: Private good: Ice cream. Producer can just not give the ice cream to someone that the producer doesn't like(excludable) When somebody consumes the ices cream, its gone!!!!(rival in consumption) Public good: tornado siren. Producer can't force somebody to not hear the siren.(not excludable) The siren sound doesn't go away just because somebody heard it(not rival in consumption) Common resources: fish in the ocean. Producer can't force somebody to not catch the fish in the ocean.(not excludable) A fish, when caught, is gone form the ocean.(rival in consumption) Natural Monopoly: fire protection. Producer can just not protect a house from burning.(excludable) The service doesn't diminish because somebody else used it.(not rival in consumption)

When a good is not excludable, the problem of free rider arises. Free rider is a person who receives the benefit of a good but does not pay for it. In private markets, not nobody will produce goods that are not excludable, because then they can not charge the cost of it. However, when the government decides that the total benefits of a public good exceed its costs, the government will provide the goods, pay for it with tax revenue, and make everyone better off. Then, how do we decide if the benefits exceed the cost?

The costs and benefits of a public good to the society can be compared through using the cost-benefit analysis.

chapter 11 key concepts 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 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 receives 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 desirable from the standpoint of society as a whole

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Sources: http://lsolum.typepad.com/legal_theory_lexicon/images/2007/03/25/public_goods_3.jpg http://www.plain-sense.com/olli/images/Sun_Public_Good.gif