PUBLIC GOODS AND COMMON RESOURCES

must know vocabulary-
excludability: a good that only people allowed can use
rivalry in consumption: a good that decreases for another if a person uses it
private goods: excludable and rival in consumption goods
public goods: neither excludable nor rival in consumption goods
common resources: rival in consumption but not excludable goods
free rider: a person who benefits on the cost of other people and pays nothing for the benefit
cost-benefit analysis: a study that comparing the cost and benefit from public goods provided in the society
Tragedy of the Commons: a story that exemplifies why common resources are excessively used than desired

Different Kinds of Goods

First ask:
- Is it excludable? (Can people be prevented from using the good?)
- Is is rival in consumption? (Does one person's use diminish the good for another person?)

1. Private Goods: excludable and rival in consumption

For example, a chocolate bar. If you own a chocolate bar, you don't need to give it to anyone. Therefore, it is excludable since you can prevent somebody from eating it. However, if you do give it to someone and they take a bite of it, it diminishes the good for you. As a result, it is considered and excludable and rival in consumption.

2. Public Goods: neither excludable nor rival in consumption

For example, uncogested toll roads. You can go on the road without a toll. Therefore, the road is not excludable. Also, no matter how many times you go on the road, the road does not diminish for anybody. As a result, it is not excludable nore rival in consumption.

3. Common resources: rival in consumption but not excludable

Common resources can include goods such as fish in the ocean. Although people aren't prevented from fishing, they are limited. If people fish more and more, the quantity of fish for the others diminish. As a result, common resources such as fish in the ocean is considered rival in consumption, but not excludable.

4. Natural monopoly: excludable but not rival in consumption

For example, cable TV. To watch cable TV, people have to pay for it. Therefore, they can be prevented from watching it since money has to be given to watch it. However, it isn't rival in consumption since one person watching cable TV won't decrease the good for any other person watching it as well.

PUBLIC GOODS

*Government provide public goods due to the reason that the private market would not produce on its own efficiently. However,public goods have free rider problem since it is no excludable nor rival in consumption.

Public goods have free rider problems. Therefore, people who do not pay for the good benefits at the cost of others. For example, fire works. When I lit up fire works in the sky, anybody near by can watch it and enjoy it. However, only I paid for it. The free rider prolem cuases market failure because people's incentives to benefit without a price would cause the market to provide an inefficient outcome. This market failure is caused by externality. As a result, the private markets fail to produce a efficient outcome. For, the government provides the public goods. However, determining what kinds of public goods to provide and in what quantities is the difficult part. Therefore, they use the cost-benefit analysis. This way they compare the total benefits of all those who would use it to the costs of the good they are producing and its maintainance fee.

*Key Public Goods

National defense, Basic Research, and Fighting Poverty.

Is it private or public?

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Some goods are believed to be uncertain in whether they are public or private. For example, fireworks. When fireworks are displayed in a public location, it's considered as a public good since everyone can see it for free without ruining it for anyone else. However, if the fireworks occurs in a private area, where people pay to watch it, it is considered as a private good because it's excludable by not allowing people who do not pay. However, fireworks can create a free rider problem. The reason is because whether it's private or not, it can be viewed by others outside of the private area. Therefore, people outside of the private locations may have the incentives to benefit from it by enjoying it without paying; moreover, at the expense of another person. Due to the enigma in deciding whether a certain good is private or public, the government oes through the process of cost-benefit analysis in order to determine the good's trait. However, even in this analysis, it's hard to determine the public goods profit because it does not show people's incentives or willingness to pay. However, since public goods show the people's willingness to pay, it's easier to forsee. Yet, the analysis still has a difficult time to decide upon providing a public good or not.

COMMON RESOURCES

Common resources like public goods are free of charge. However, it is rival in consumption; therefore, there are limits. Therefore, common resources have a problem just like the public goods. It is understoof as the Tragedy of the Commons. Since it is rival in consumption, when one person uses the good, it diminishes the good for other people. Therefore, it causes a negative externality. For, the people have incentives to excessively use it. As a result, the government uses taxing and limit systems to reduce the common resources. Or, they sometimes even convert it into a private good.

*Key Common Resources

Clean Air and Water, Congested Roads, and Wildlife.

Importance of Property Rights

Markets fail to allocate resource efficiently due to poor established property rights. For example, a factory causes immense pollution because the pollution produced has no owner; therefore, the factory isn't charged for it. Also, other resources like clean air and water has no cost and value placed on it for people to profit. Therefore, lack of property rights causes government failure. However, the government can only solve the problem to some extent by defining the property rights, making restrictions, and regulating it like a private market. However, resources such as national defense is a good that the market fails to supply; therefore, government has to supply it.

Summary


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Questions:
1. What're the two questions asked to differentiate goods?
2. If a good is excludable but not rival in consumption, what is it?
3. Why does government provide public goods?
4. A public good is
a. excludable
b. rival in consumption, but not excludable
c. neither excludable nor rival in consumption
d. not rival in consumption
5. A key common resource is
a. uncongested road
b. clean air
c. fire sirens
d. national defense
6. Markets fail to allocate resources efficiently due to
a. externalities
b. inflation
c. property rights
d. Tragedy of the Commons



Answers:

1. Is it excludable? (Can people be prevented from using the good?)
Is is rival in consumption? (Does one person's use diminish the good for another person?)
2. Natural monopoly
3. Government provide public goods due to the reason that the private market would not produce on its own efficiently. However,public goods have free rider problem since it is no excludable nor rival in consumption.
4. C
5. B
6. C