Nov 12, Public Goods and Common Resources

Nov 12, Public Goods and Common Resources - Public Goods...

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Public Goods and Common Resources Context and Purpose Address a group of goods that are free for the consumer. o When goods are free, market forces that normally allocate resources are absent. Free goods may not be produced and consumed in the proper amounts Government can potentially remedy this market failure and improve economic well-being The different kinds of goods When thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the good excludable? Can a person be excluded from its use? Is the good rival? Does one person’s use diminish other people’s use? The different Kinds of Goods Private Goods o Are both excludable and rival. Public Goods o Are neither excludable nor rival. Common Resources o Are rival but not excludable. Natural Monopolies o Are excludable but not rival Four Types of Goods
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Public goods A Candy Bar Nearly impossible to keep others from viewing it One person’s enjoyment does not preclude other from enjoying the good. The Free Rider Problem Since people cannot be excluded from enjoying the benefits of a public good, individuals may withhold paying for the good hoping that others will pay for it. A free-rider is a person who receives the benefit of a good but avoids paying for it. The free-rider problem prevents private markets from supplying public goods. Solving the Free-Rider Problem o The government can decide to provide the public good if the total benefits exceeds the costs o The government can make everyone better off by providing the public good and paying for it with tax revenue Important Public Goods o National Defense o Basic Research o Fighting Poverty The Difficulty Job of Cost-Benefit Analysis Cost benefit analysis refers to a study that compares the costs and benefits to society of providing a public good. The total benefits of all those who use the good must be compared to the costs of providing and maintaining the public good o It is difficult to do because of the absence of prices needed to estimate social benefits and resource costs. o
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Nov 12, Public Goods and Common Resources - Public Goods...

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