Economics: Public Goods and Common Resources
Terms in this set (31)
A good or service whose consumption by one person excludes consumption by others (one's own candy bar, plane tickets, pizza, stereo or a car).
A good or service whose consumption by one person does not exclude consumption by others (national defense, flood control, street lights, open-sources software).
A good is excludable if
there is a way to restrict access to it.
For example, a concert in a theater is excludable because the theater management can restrict attendance to only those people who buy a ticket, but a concert in a public park is non-excludable because anyone is allowed to walk through the park and enjoy the music.
A good is considered rival in consumption when
consumption by one individual decreases the amount that can be consumed by another individual at the same time
It is not possible to prevent an individual from using the good
Non-rival in competition
Consumption of the good by one person does not decrease the ability of other people to consume the good
Use the different combinations of excludable and rival in consumption to classify the good:
1) Excludable but non-rival in consumption
2) Nonexcludable and non-rival in consumption
3) Nonexcludable but rival-in-consuption
4) Excludable and rival in consumption.
Provide Examples of each
1) Club Good: Artificially scarce goods: (on-demand movies, computer software - have to buy-rent-purchase software or the movie but more than 1 person can use/enjoy it at a time)
2) Public Good (national defense, a dam)
3) Common Resource (clean water, biodiversity: like plants or public zoo)
4) Private Good (your cell phone or car)
Examples of Private Good, what's good to remember about private goods.
food, clothing, toiletries, etc. Note: Private good is the most common category of goods.
A dock on a lake or a cabanna are box examples of
a common resource,
both are open to the public but are rivals in consumption since two people cannot use the dock (or the cabanna) at the same time. However, it is nonexcludable since anyone is free to use the lake.
If Same and Kenji each contribute an amount of $300 to a park and each receive .70 for each dollar they contribute, their combined benefit is
Since the park is a public good, each will benefit from the contribution of the other, this amount will be .70 times 300 or $210. Hence the combined benefit is $210 times 2 = 420.
Refers to a person who receives the benefit of a good (a public good) but does not pay for it
e.g. a public good like maintaining biodiversity: the reason why this is a problem is because if this good was maintained by peoples' efforts, most people will not pay and be dependent on other (like rich people) to pay for this and they can just get a free ride - this reduces the incentive of everybody to pay for this good that's why the government responds by taking the initiative and maintaining and supply the public good itself.
The free-ride problem of public goods causes (hint: government)
Makes it necessary for the government to supply public goods by itself (in doing so it can impose taxes on individuals).
A common resource
is a good that is nonexcludable but rival in consumption, e.g., forests, fisheries, wildlife...
The Tragedy of the Commons definition; synonymous with;
the depletion of a common resource due to individually rational but collectively inefficient overconsumption...
Example: if we catch all fish in the lack, there won't be available fish for us next season (tragedy of overuse/abuse)
Explain the market failure not in terms of externalitites but in terms of private/public goods.
Private market will tend to under-produce public goods (because it doesn't reap any private benefit) and overproduce private goods. That's why if we want public goods, we need a NON-market force (government intervention) to provide them.
List the possible solutions to the problems associated with the difficult supply of public goods.
Solutions to the free-rider problem:
1) Private donations and voluntary contributions: For example: scientific research is largely funded by voluntary contributions.
However it is not enough to finance huge, socially important projects like basic medical/scientific research.
Subject to the free rider problem.
2) Government intervention
Provided by government and paid for by taxes (national defense, legal system, disease control, fire control). The goal of the government here is to reach optimal output (allocative efficiency): the good is supplied at its optimal (not necessarily the market equilibrium) quantity.
Fishing in a lake is an example of
a common resource;
Fire department, national parks, upkeep of streets are examples of
The market quantity in the case of a common resource is; this is similar to the supply of ...
more than the optimal quantity of output. (think fisherman catching an excessive amount of fish to reap more profit by selling them without caring what will happen in the long-term when there is shortage or absence of the fish in the market due to overfishing. In this case the supply of the fish is similar to the supply of negative externalitites.
Ways the government can efficiently manage a common resource (mentioned in previous chapter probably too)
1) a tax or a regulation imposed on the use of the common resource.
2) making it excludable and assigning property rights to it.
3) creating a system of tradable licenses for the right to use the common resource.
What's the name of the analysis that governments use to estimate the amount of intervention in the market.
Governments use cost-benefit analysis to determine the amount of intervention in the market in the case of externalities and public goods.
The difficulty of cost-benefit analysis is the ability to calculate accurate measures of the costs and benefits of producing goods.
Example: people will tend to "overstate" the value of public goods because they want them for free.
State the problem with club goods (artificially scarce goods)
An artificially scarce good is a good that is excludable, but nonrival in consumption.
Because they are excludable (like on-demand movies), the producers can charge people for consuming them.
Although Marginal Cost = zero, price will be more than marginal cost, thus there is a deadweight loss with artificially scarce goods. In other words there is allocative inefficiency: we are not producing at the socially optimal quantity.
How does the government deal with market failure due to market power?
The government can use Anti-trust policy to alter market structure or prevent abuse of market power.
Inequity (state of unfairness)
Inequity addresses the "For Whom" question; it refers to the state of the market when it enriches some people while leaving others in dire states.
Inequity is another bad thing in the market that requires government intervention.
How does the government deal with inequities
The government must intervene to address inequity because services to the under-served in the market is also subject to the free rider problem in which people will say that the responsibility of caring for the poor people is the responsibility of charities. But private charities do not provide adequate (or enough) support for those who do not have enough to eat or don't have housing and hence the government must intervene
By imposing higher Taxes on people with higher income to ensure a more equal distribution of well-being and transfers or transfer systems. (explained in other flash cards).
Transfers or transfer payments; provide examples
are payments to individuals for which no current goods or services are exchanged (or demanded from the individuals). Examples include Social Security, Welfare benefits as well as Unemployment benefits
is a good or service that is given to poor people, (unlike transfer payments though which involve money) because society deems everyone is entitled to some minimal quantity of this good or service.
They are distributed by the government in the form of in-kind transfers (like transferring the benefit in the form of an asset not cash) instead of cash transfers. Examples of that is Food stamps
Housing vouchers, Medicaid (all of these are not money but things that like money can buy the poor person food for instance).
Four Categories of Goods:
4-Artificially scarce goods
Artificially Scarce Goods
excludable, but not rival,
ex: MP3s, Pay-per-view, subscription only websites, etc.
a problem that occurs when the non-excludability of a public good leads to under-supply...
people can enjoy the benefits of something without paying the costs...