ch11 - Chapter11 11 PUBLICGOODSAND COMMONRESOURCES...

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Public Goods and Common Resources WHAT’S NEW IN THE THIRD EDITION: There have been no substantial changes to this chapter. LEARNING OBJECTIVES: By the end of this chapter, students should understand: the defining characteristics of public goods and common resources. why private markets fail to provide public goods. some of the important public goods in our economy. why the cost–benefit analysis of public goods is both necessary and difficult. why people tend to use common resources too much. some of the important common resources in our economy. CONTEXT AND PURPOSE: Chapter 11 is the second chapter in a three-chapter sequence on the economics of the public sector.  Chapter 10 addressed externalities. Chapter 11 addresses public goods and common resources—goods  for which it is difficult to charge prices to users.  Chapter 12 will address the tax system. The purpose of Chapter 11 is to address a group of goods that are free to the consumer. When  goods are free, market forces that normally allocate resources are absent. Therefore, free goods, such as  215 PUBLIC GOODS AND  COMMON RESOURCES 11
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216   Chapter 11/Public Goods and Common Resources playgrounds and public parks, may not be produced and consumed in the proper amounts. Government  can potentially remedy this market failure and improve economic well-being.
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Chapter 11/Public Goods and Common Resources   217 KEY POINTS: 1. Goods differ in whether they are excludable and whether they are rival.  A good is excludable if it is  possible to prevent someone from using it.  A good is rival if one person’s use of the good reduces  other people’s ability to use the same unit of the good.  Markets work best for private goods, which  are both excludable and rival.  Markets do not work as well for other types of goods. 2. Public goods are neither rival nor excludable.  Examples of public goods include fireworks displays,  national defense, and the creation of fundamental knowledge.  Because people are not charged for  their use of the public good, they have an incentive to free ride when the good is provided privately.  Therefore, governments provide public goods, making their decision about the quantity based on  cost–benefit analysis. 3. Common resources are rival but not excludable.  Examples include common grazing land, clean air,  and congested roads.  Because people are not charged for their use of common resources, they tend  to use them excessively.  Therefore, governments try to limit the use of common resources.
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