Ch16 - Chapter 16: Public Goods and Common Resources I....

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C h a p t e r 1 6 : P u b l i c G o o d s a n d C o m m o n R e s o u r c e s I. Classifying Goods and Resources A. There are key characteristics that influence how efficiently the market can allocate resources. 1. Excludability in consumption a) A good or service is excludable if only the people who pay for it are able to enjoy its benefits. b) A good or service is nonexcludable if everyone benefits from it regardless of whether they pay for it. 2. Rivalry in consumption. a) A good, service or resource is rival if its use by one person decreases the quantity available for someone else. b) A good, service or resource is nonrival if its use by one person does not decrease the quantity available for someone else. B. Figure 16.1 illustrates how combinations of these two key characteristics create four categories of goods and resources that help us better understand how efficiently the market handles their allocation. 1. A private good is both rival and excludable. Examples: A can of Mountain Dew, a cow owned by a dairy farmer. 2. A public good is both non-rival and nonexcludable. Examples: National defense, police patrols. Public goods create a free-rider problem , the absence of an incentive for people to pay for what they consume. 3. A common resource is rival and nonexcludable. Examples: Fish in the ocean, clean air. Common resources create the tragedy of the commons , the absence of incentives to prevent the overuse and depletion of a resource. 4. A natural monopoly occurs when economies of scale exist over the entire range of output for which there is a demand. If the good is produced at zero marginal cost, the good is nonrival. If it is also excludable, it is produced by a natural monopoly. Examples: Internet, cable television. II. Public Goods and the Free Rider Problem A. The benefits of a public good can be illustrated with a demand curve (Figure 16.2) that reflects each individual’s demand for the good. 1. An individual’s demand curve for a good expresses the maximum amount that an individual is willing to pay for each quantity of the good Figure 16.2 (a) and Figure 16.2 (b) show an individual’s demand (or marginal benefit) curve. 2. Public goods are non-rival, so once a given quantity of that good is provided, all individuals in society can consume that quantity without decreasing the quantity available for any other individual. 3. As illustrated in Figure 16.2 (c), the sum of the maximum amounts that all individuals would pay at each quantity reveals the marginal social benefit to society of each possible quantity consumed Summing the marginal social benefit across all possible quantities reveals the total benefits to society from consuming a given level of the good.
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B. The efficient quantity of a public good is the quantity for which the marginal social benefit to society is equal to the marginal social cost to society. 1.
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Ch16 - Chapter 16: Public Goods and Common Resources I....

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