Topic 5:

Public Goods and

Common Resources
ECON 1210
Economics and Society
Fall 2023

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Motivation
⚫ Why does govt provide some goods and
services such as the enforcement of law and
order and national defense?
⚫ Why don’t we let private firms produce
these items?
⚫ Ocean fish are a common resource that
everyone is free to take
⚫ Are our fish stocks being depleted? What
can be done to conserve the world’s fish?
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Introduction
⚫ We consume many goods without paying
⚫ parks, national defense, clean air & water

⚫ When goods are free, the market forces that

normally allocate resources are absent
⚫ The private market may fail to provide the
socially efficient quantity of such goods
⚫ Recall: Governments can sometimes improve
market outcomes
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Classifying Goods and
Resources
⚫ What is the essential difference between:
⚫ HK police force Vs security guards hired by
tycoons
⚫ Fish in the South China Sea Vs fish in a
fish farm
⚫ Eason Chan live concert Vs concert on TV

⚫ All goods and services can be classified

according to whether they are excludable or
not excludable, and rival or not rival
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Excludable
⚫ A good is excludable if only the people who
pay for it are able to enjoy its benefits.
⚫ a person can be prevented from using it

⚫ Examples:
⚫ security guards hired by tycoons

⚫ buffets served by restaurants

⚫ Eason Chan live concert

⚫ dial-up internet service

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Not Excludable
⚫ A good is not excludable if everyone benefits
from it regardless of whether they pay for it
⚫ a person cannot be prevented from using it

⚫ Examples:
⚫ services of the HK police force

⚫ fish in the South China Sea

⚫ a concert on television

⚫ national defense

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Rival
⚫ A good is rival if one person’s use of it
decreases the quantity available for someone
else
⚫ Examples:
⚫ fish in the South China Sea

⚫ congested roads

⚫ elephants in Africa

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Not Rival
⚫ A good is not rival if one person’s use of it
does not decrease the quantity available for
someone else
⚫ Examples:
⚫ services of the HK police force

⚫ a concert on television

⚫ national defense

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Classifying Goods and
Resources
⚫ Private Goods: both rival and excludable
⚫ Example: Food, Clothing

⚫ Public Goods: both not rival and not

excludable
⚫ A public good can be consumed
simultaneously by everyone, and no one
can be excluded from its benefits
⚫ Example: National Defense

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Classifying Goods and
Resources
⚫ Common Resources: rival but not excludable
⚫ A unit of a common resource can be used
only once, but no one can be prevented from
using what is available
⚫ Example: Ocean fish

⚫ Rival: a fish taken by one person isn’t

available for anyone else
⚫ Not excludable: it is difficult to prevent
people from catching them
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Classifying Goods and
Resources

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Different Kinds of Goods and
Resources: Implication
⚫ This topic 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
production can lead to an inefficient outcome
⚫ Public policy can potentially raise economic
well-being

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Public Goods
⚫ Public 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 paying for it
⚫ If good is not excludable, people have
incentive to be free riders:
⚫ because firms cannot prevent non-payers
from consuming the public good

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Public Goods
⚫ Result: The good is not produced, even if
buyers collectively value the good higher than
the cost of providing it
⚫ If 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
⚫ Example: services of the HK police force

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Example: New Year
Countdown Fireworks
⚫ not excludable: it would be nearly impossible
to keep others from viewing it
⚫ not rival: one person’s enjoyment does not
preclude others from enjoying the fireworks
⚫ Free-Rider Problem: difficult to sell tickets to
the fireworks show because it is not
excludable

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Example: New Year
Countdown Fireworks
⚫ If the social value of the fireworks show is
greater than the cost of producing it, it would
be efficient for the fireworks show to be
produced
⚫ Result: Govt often sponsors part of the cost
of the New Year Countdown / Chinese New
Year Fireworks

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Public Goods: Final Say
⚫ Problem: Measuring the benefit is usually
difficult
⚫ Cost-benefit analysis: a study that compares
the costs and benefits of providing a public
good
⚫ Cost-benefit analyses are imprecise, so the
efficient provision of public goods is more
difficult than that of private goods

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Common Resources
⚫ Like public goods, common resources are not
excludable
⚫ cannot prevent free riders from using

⚫ little incentive for firms to provide

⚫ role for govt: seeing that they are provided

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Common Resources
⚫ Additional problem with common resources:
rival in consumption
⚫ each person’s use reduces others’ ability
to use
⚫ role for govt: ensuring they are not
overused

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The Tragedy of the Commons
⚫ The tragedy of the commons is the absence
of incentives to prevent the overuse and
depletion of a commonly owned resource
⚫ Common resources get used more than is
socially desirable
⚫ Examples: fish in oceans, quality of the
earth’s atmosphere

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 The Original Tragedy of the
Commons
⚫ The term “tragedy of the commons” comes
from fourteenth-century England, where
areas of rough grassland surrounded villages
⚫ The commons

were open to all

and used for
grazing sheep
owned by the
villagers
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The Original Tragedy of the
Commons
⚫ As the population grows, the # of sheep
grows
⚫ The amount of land is fixed, the 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.

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The Original Tragedy of the
Commons
⚫ The tragedy is due to an externality:
Allowing one’s flock to graze on the common
land reduces its quality for other families
⚫ People neglect this external cost, resulting in
overuse of the land
⚫ End result: production become not
sustainable!

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What the govt can do to prevent
the tragedy in the villages?
⚫ regulate use of the land: regulated the
number of sheep each farmer could have
⚫ impose a corrective tax on the use of the land
to “internalize the externality”
⚫ 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
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Policy Options to Prevent
Over-Consumption of
Common Resources
Command-and-control Approach
⚫ Regulate use of the resource

⚫ Setting of production quota (ideally equal to

the social optimal quantity)

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Example: Fishing Moratorium
⚫ Chinese govt launched fishing moratorium in
the South China Sea (南海休漁期) since 1999
⚫ Fishing is banned for about 2 months in
summer every year
⚫ To maintain the sustainable production of the
ocean fisheries and rehabilitate the marine
resources

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Policy Options to Prevent
Over-Consumption of
Common Resources
Market-based Policies
⚫ impose a corrective tax to internalize the
externality
⚫ auction off permits allowing use of the
resource
⚫ if the resource is land, convert to a private
good by dividing and selling parcels to
individuals (become excludable)
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Conclusion
⚫ With both public goods and common
resources, the market outcome will be
inefficient because of the lack of well-defined
property rights
⚫ Public goods tend to be under-provided,
while common resources tend to be over-
consumed

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Conclusion
⚫ Nobody can charge people who benefit from
national defense
⚫ Result: too little defense

⚫ Nobody owns the air, so no one can charge

polluters
⚫ Result: too much pollution

⚫ The govt can potentially solve these

problems with various policy options
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