Economics: Public Goods and Common Resources

10/16/21
N. GREGORY MANKIW
Look for the answers to these questions:
PRINCIPLES OF
ECONOMICS • What are public goods?
Eight Edition • What are common resources?
Give examples of each.
• Why do markets generally fail to provide the
CHAPTER efficient amounts of these goods?
Public Goods and • How might the government improve market
11 Common Resources outcomes in the case of public goods or
common resources?
Premium PowerPoint Slides by:
V. Andreea CHIRITESCU
Eastern Illinois University
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
1
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 2
management system for classroom use. management system for classroom use.
1 2
Introduction The Different Kinds of Goods

• We consume many goods without paying: • Excludability
– Parks, national defense, clean air & water – Property of a good whereby a person can be
prevented from using it
– When goods have no prices, the market
– Excludable: fish tacos, wireless Internet access
forces that normally allocate resources are
– Not excludable: radio signals, national defense
absent
• Rivalry in consumption
– The private market may fail to provide the
– Property of a good whereby one person’s use
socially efficient quantity of such goods
diminishes other people’s use
• ‘Governments can sometimes improve – Rival: fish tacos
market outcomes’ – Not rival: An MP3 file of Lady Gaga’s latest single
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 3 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 4
3 4
1
10/16/21
The Different Kinds of Goods Active Learning 1 Categorizing Roads
• Private goods • A road is which of the four kinds of goods?

– Excludable & Rival in consumption (food) • Hint: The answer depends on whether the
• Public goods road is congested or not, and whether it’s a
– Not excludable & Not rival in consumption toll road or not. Consider the different
(national defense) cases.
• Common resources
– Rival in consumption & Not excludable (fish in the
ocean)
• Club goods
– Excludable & Not rival in consumption (cable TV)
5 6
Active Learning 1 Answers The Different Kinds of Goods

• Rival in consumption? Only if congested. • Public goods and common resources
• Excludable? Only if a toll road. – Externalities arise because something of
Four possibilities: value has no price attached to it
– Private decisions about consumption and
• Uncongested non-toll road: public good
production can lead to an inefficient
• Uncongested toll road: club good outcome
– Public policy can potentially raise
• Congested non-toll road: common resource
economic well-being
• Congested toll road: private good
7 9
2
10/16/21
Public Goods Public Goods

• Free rider • Government can remedy the free-rider
– Person who receives the benefit of a good problem
but avoids paying for it – If total benefits of a public good exceeds
• The free-rider problem its costs
– Public goods are not excludable, so – Provide the public good
people have an incentive to be free riders – Pay for it with tax revenue
– Prevents the private market from – Make everyone better off
supplying the goods – Problem: Measuring the benefit is usually
– Market failure difficult
10 11
Public Goods Public Goods

• Cost–benefit analysis • Some important public goods
– Compare the costs and benefits to society – National defense
of providing a public good • Very expensive public good
– Doesn’t have any price signals to observe • $748 billion in 2014
– Government findings: rough – Basic research
approximations at best • General knowledge
– Cost-benefit analyses are imprecise, so • Subsidized by government
the efficient provision of public goods is • The public sector fails to pay for the right
more difficult than that of private goods amount and the right kinds
12 13
3
10/16/21
Public Goods Common Resources

• Some important public goods • Common resources are not excludable
– Antipoverty programs financed by taxes – Cannot prevent free riders from using
• Welfare system (Temporary Assistance for – Little incentive for firms to provide
Needy Families program, TANF) – Role for government: seeing that they are
– Provides a small income for some poor families provided
• Food stamps (Supplemental Nutrition • Common resources: rival in consumption
Assistance Program, SNAP)
– Subsidize the purchase of food for those with low
– Each person’s use reduces others’ ability to
incomes use
• Government housing programs – Role for government: ensuring they are not
– Make shelter more affordable overused
14 15
Common Resources Common Resources

• The tragedy of the commons • The tragedy of the commons
– Parable that shows why common – Social and private incentives differ
resources are used more than desirable • The private incentives (using the land for free)
• Medieval town where sheep graze on outweigh the social incentives (using it
common land carefully)
• As the population grows, the number of – Arises because of a negative externality
sheep grows • Allowing one’s flock to graze on the common
• The amount of land is fixed, the grass begins land reduces its quality for other families
to disappear from overgrazing – People neglect this external cost, resulting
in overuse of the land
16 17
4
10/16/21
Active Learning 2 Active Learning 2 Answers

Policy options for common resources
• Impose a corrective tax on the use of the
• What could the townspeople (or their land to “internalize the externality.”
government) have done to prevent the
• Regulate use of the land (the “command-
tragedy?
and-control” approach).
• Try to think of two or three options.
• 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.
18 19
Policy Options to Prevent Policy Options to Prevent

Overconsumption of Common Resources Overconsumption of Common Resources
• Regulate use of the resource • Auction off permits allowing use of the
• Impose a corrective tax to internalize the resource
externality – Example: spectrum auctions by the
– Hunting & fishing licenses, entrance fees U.S. Federal Communications
for congested national parks Commission
• If the resource is land, convert to a private
good
– By dividing and selling parcels to
individuals
20 21
5
10/16/21
Common Resources Common Resources

• Some important common resources • Some important common resources
– Clean air and water – Fish, whales, and other wildlife
• Negative externality: pollution • Oceans: the least regulated common
• Regulations or corrective taxes resource
– Congested roads –Needs international cooperation
• Negative externality: congestion
–Difficult to enforce an agreement
• Corrective tax: charge drivers a tool
• Fishing and hunting licenses
• Tax on gasoline
• Limits on fishing and hunting seasons
• Limits on size of fish
• Limits on quantity of animals killed
22 23
“You’ve Got Spam!”

Importance of Property Rights
• Some firms use spam e-mails to
advertise their products. • Market fails to allocate resources
efficiently
– Spam is not excludable: firms cannot be
prevented from spamming – Because property rights are not well
established
– Spam is rival: as more companies use
spam, it becomes less effective. – Some item of value does not have an
owner with the legal authority to control it
• Thus, spam is a common resource.
– Like most common resources, spam is
overused – which is why we get so much
of it!
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 24 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 25
24 25
6
10/16/21
Importance of Property Rights Summary

• The government can potentially solve the • Goods differ in whether they are excludable
problem and whether they are rival in consumption.
– Help define property rights and thereby – A good is excludable if it is possible to prevent
someone from using it.
unleash market forces
– A good is rival in consumption if one person’s
– Regulate private behavior use of the good reduces others’ ability to use
– Use tax revenue to supply a good that the the same unit of the good.
market fails to supply – Markets work best for private goods, which are
both excludable and rival in consumption.
– Markets do not work as well for other types of
goods.
26 27
Summary Summary
• Public goods are neither rival in consumption nor • Common resources are rival in consumption
excludable. but not excludable.
– Examples of public goods include fireworks
– Examples include common grazing land, clean
displays, national defense, and the discovery of
air, and congested roads.
fundamental knowledge.
– Because people are not charged for their use of – Because people are not charged for their use
the public good, they have an incentive to free of common resources, they tend to use them
ride, making private provision of the good excessively.
untenable. – Therefore, governments use various
– Therefore, governments provide public goods, methods, such as regulations and corrective
basing their decision about the quantity of each taxes, to limit the use of common resources.
good on cost–benefit analysis.
28 29

Economics: Public Goods and Common Resources

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Economics: Public Goods and Common Resources

Uploaded by

Copyright:

Available Formats

10/16/21

Introduction The Different Kinds of Goods

The Different Kinds of Goods Active Learning 1 Categorizing Roads

• Private goods • A road is which of the four kinds of goods?

Active Learning 1 Answers The Different Kinds of Goods

Public Goods Public Goods

Public Goods Public Goods

Public Goods Common Resources

Common Resources Common Resources

Active Learning 2 Active Learning 2 Answers

Policy Options to Prevent Policy Options to Prevent

Common Resources Common Resources

“You’ve Got Spam!”

Importance of Property Rights Summary

You might also like