1、 2009 South-Western,a part of Cengage Learning,all rights reservedC H A P T E REconomicsPremium PowerPoint Slides by Ron Cronovich11What are public goods?What are common resources?Give examples of each.Why do markets generally fail to provide the efficient amounts of these goods?How might the govern
2、ment improve market outcomes in the case of public goods or common resources?1PUBLIC GOODS AND COMMON RESOURCES2IntroductionWe consume many goods without paying:parks,national defense,clean air&water.When goods have no prices,the market forces that normally allocate resources are absent.The private
3、market may fail to provide the socially efficient quantity of such goods.One of the Ten Principles from Chapter 1:Governments can sometimes improve market outcomes.PUBLIC GOODS AND COMMON RESOURCES3Important Characteristics of GoodsA good is excludable if a person can be prevented from using it.Excl
4、udable:fish tacos,wireless internet accessNot excludable:FM radio signals,national defenseA good is rival in consumption if one persons use of it diminishes others use.Rival:fish tacosNot rival:An MP3 file of Kanye Wests latest singlePUBLIC GOODS AND COMMON RESOURCES4The Different Kinds of GoodsPriv
5、ate goods:excludable,rival in consumptionExample:foodPublic goods:not excludable,not rivalExample:national defenseCommon resources:rival but not excludableExample:fish in the oceanNatural monopolies:excludable but not rivalExample:cable TVA road is which of the four kinds of goods?Hint:The answer de
6、pends on whether the road is congested or not,and whether its a toll road or not.Consider the different cases.5Rival in consumption?Only if congested.Excludable?Only if a toll road.Four possibilities:Uncongested non-toll road:public goodUncongested toll road:natural monopolyCongested non-toll road:c
7、ommon resourceCongested toll road:private good6PUBLIC GOODS AND COMMON RESOURCES7The Different Kinds of GoodsThis chapter focuses on public goods and common resources.For both,externalities arise because something of value has no price attached to it.So,private decisions about consumption and produc
8、tion can lead to an inefficient outcome.Public policy can potentially raise economic well-being.PUBLIC GOODS AND COMMON RESOURCES8Public GoodsPublic goods are difficult for private markets to provide because of the free-rider problem.Free rider:a person who receives the benefit of a good but avoids
9、paying for it If good is not excludable,people have incentive to be free riders,because firms cannot prevent non-payers from consuming the good.Result:The good is not produced,even if buyers collectively value the good higher than the cost of providing it.PUBLIC GOODS AND COMMON RESOURCES9Public Goo
10、dsIf the benefit of a public good exceeds the cost of providing it,govt should provide the good and pay for it with a tax on people who benefit.Problem:Measuring the benefit is usually difficult.Cost-benefit analysis:a study that compares the costs and benefits of providing a public good Cost-benefi
11、t analyses are imprecise,so the efficient provision of public goods is more difficult than that of private goods.PUBLIC GOODS AND COMMON RESOURCES10Some Important Public GoodsNational defense Knowledge created through basic researchFighting povertyPUBLIC GOODS AND COMMON RESOURCES11Common ResourcesL
12、ike public goods,common resources are not excludable.Cannot prevent free riders from usingLittle incentive for firms to provideRole for govt:seeing that they are providedAdditional problem with common resources:rival in consumptionEach persons use reduces others ability to useRole for govt:ensuring
13、they are not overusedPUBLIC GOODS AND COMMON RESOURCES12The Tragedy of the CommonsA parable that illustrates why common resources get used more than is socially desirable.Setting:a medieval town where sheep graze on common land.As the population grows,the#of sheep grows.The amount of land is fixed,t
14、he grass begins to disappear from overgrazing.The private incentives(using the land for free)outweigh the social incentives(using it carefully).Result:People can no longer raise sheep.PUBLIC GOODS AND COMMON RESOURCES13The Tragedy of the CommonsThe tragedy is due to an externality:Allowing ones floc
15、k to graze on the common land reduces its quality for other families.People neglect this external cost,resulting in overuse of the land.What could the townspeople(or their government)have done to prevent the tragedy?Try to think of two or three options.14Impose a corrective tax on the use of the lan
16、d to“internalize the externality.”Regulate use of the land(the“command-and-control”approach).Auction off permits allowing use of the land.Divide the land,sell lots to individual families;each family will have incentive not to overgraze its own land.15PUBLIC GOODS AND COMMON RESOURCES16Policy Options
17、 to Prevent Overconsumption of Common ResourcesRegulate use of the resourceImpose a corrective tax to internalize the externalityexample:hunting&fishing licenses,entrance fees for congested national parksAuction off permits allowing use of the resourceexample:spectrum auctions by the U.S.Federal Com
18、munications CommissionIf the resource is land,convert to a private good by dividing and selling parcels to individualsPUBLIC GOODS AND COMMON RESOURCES17Some Important Common ResourcesClean air and waterCongested roadsFish,whales,and other wildlifePUBLIC GOODS AND COMMON RESOURCES18CASE STUDY:“Youve
19、 Got Spam!”Some firms use spam emailsto advertise their products.Spam is not excludable:Firms cannot be prevented from spamming.Spam is rival:As more companies use spam,it becomes less effective.Thus,spam is a common resource.Like most common resources,spam is overused which is why we get so much of
20、 it!“Spam”email is named after everyones favorite delicacy.PUBLIC GOODS AND COMMON RESOURCES19CONCLUSIONPublic goods tend to be under-provided,while common resources tend to be over-consumed.These problems arise because property rights are not well-established:Nobody owns the air,so no one can charg
21、e polluters.Result:too much pollution.Nobody can charge people who benefit from national defense.Result:too little defense.The govt can potentially solve these problems with appropriate policies.A good is excludable if someone can be prevented from using it.A good is rival in consumption if one pers
22、ons use reduces others ability to use the same unit of the good.Markets work best for private goods,which are excludable and rival in consumption.Markets do not work well for other types of goods.20Public goods,such as national defense and fundamental knowledge,are neither excludable nor rival in co
23、nsumption.Because people do not have to pay to use them,they have an incentive to free ride,and firms have no incentive to provide them.Therefore,the government provides public goods,using cost-benefit analysis to determine how much to provide.21Common resources are rival in consumption but not excl
24、udable.Examples include common grazing land,clean air,and congested roads.People can use common resources without paying,so they tend to overuse them.Therefore,governments try to limit the use of common resources.22PUBLIC GOODS AND COMMON RESOURCES23Problems and Applications:3.Charlie loves watching
25、 Teletubbies on his local public TV station,but he never sends any money to support the station during its fundraising drives.a.What name do economists have for Charlie?23PUBLIC GOODS AND COMMON RESOURCES24b.How can the government solve the problem caused by people like Charlie?c.Can you think of ways the private market can solve this problem?How does the existence of cable TV alter the situation?24
