Chapter 11

• Excludability

  – Property of a good whereby a person can be prevented from using it
• Rivalry in consumption

  – Property of a good whereby one person’s use diminishes other people’s use
• Private goods

  – Excludable & Rival in consumption
• Public goods

  – Not excludable & Not rival in consumption
• Common resources

  – Rival in consumption & Not excludable
• Club goods

  – Excludable & Not rival in consumption

  – One type of natural monopoly
• Free rider

  – Person who receives the benefit of a good but avoids paying for it
• The free-rider problem

  – Public goods are not excludable

  – Prevents the private market from supplying the goods

  – Market failure
• National defense

  • Very expensive public good
• Basic research

  • General knowledge

  • Subsidized by government

  • The public sector fails to pay for the right amount and the right kinds
• Antipoverty programs financed by taxes

  • Welfare system (Temporary Assistance for Needy Families program, TANF)

  – Provides a small income for some poor families
• Lighthouses

  – Mark specific locations so that passing ships can avoid treacherous waters
• Something is a public good

  – Determine who the beneficiaries are

  – Determine whether the beneficiaries can be excluded from using the good
• free-rider problem

  – When the number of beneficiaries is large

  – Exclusion of any one of them is impossible
• Government

  • Decide what public goods to provide • In what quantities
• Cost–benefit analysis

  • Compare the costs and benefits to society of providing a public good

  • Doesn’t have any price signals to observe

  • Government findings: rough approximations at best
• Tragedy of the commons

  – Parable that shows why common resources are used more than desirable
• Market fails to allocate resources efficiently

  – Because property rights are not well established

  – Some item of value does not have an owner with the legal authority to control it
• The government can potentially solve the problem

  – Help define property rights and thereby unleash market forces

  – Regulate private behavior

  – Use tax revenue to supply a good that the market fails to supply
• Clean air and water

  • Negative externality: pollution

  • Regulations or corrective taxes
• Congested roads

  • Negative externality: congestion

  • Corrective tax: charge drivers a tool • Tax on gasoline
• Fish, whales, and other wildlife

  • Oceans: the least regulated common resource

  – Needs international cooperation

  – Difficult to enforce an agreement