Chapter11micro - PUBLICGOODSANDCOMMONRESOURCES When a good...

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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 When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in the proper amounts. In such cases, government policy can potentially remedy the market failure and raise economic well-being. THE DIFFERENT KINDS OF GOODS How well do markets work in providing the goods that people want? The answer to this question depends on the good being considered. TWO CHARACTERISTICS OF GOODS IN THE MARKET: Is the good excludable?  Can people be prevented from using the good? Is the good rival?  Does one person’s use of the good diminish another person’s enjoyment of it? 1. Private goods  are both excludable and rival. Consider an ice-cream cone, for example. An ice-cream cone is excludable because it is possible to prevent someone from eating an ice-cream cone—you just don’t give it to him. An ice-cream cone is rival because if one person eats an ice-cream cone, another person cannot eat the same cone. Most goods in the economy are private goods like ice-cream cones. When we analyzed supply and demand in Chapters 4, 5, and 6 and the efficiency of markets in Chapters 7, 8, and 9, we implicitly assumed that goods were both excludable and rival. 2. Public goods  are neither excludable nor rival. That is, people cannot be prevented from using a public good, and one person’s enjoyment of a public good does not reduce another person’s enjoyment of it. For example, national defense is a public good. Once the country is defended from foreign aggressors, it is impossible to prevent any single person from enjoying the benefit of this defense. Moreover, when one person enjoys the benefit of national defense, he does not reduce the benefit to anyone else. 3. Common resources  are rival but not excludable. For example, fish in the ocean are a rival good: When one person catches fish, there are fewer fish for the next person to catch. Yet these fish are not an excludable good because it is difficult to charge fishermen for the fish that they catch. 4.When a good is excludable but not rival, it is an example of a natural monopoly.  For instance, consider fire protection in a small town. It is easy to exclude people from enjoying this good: The fire department can just let their house burn down. Yet fire protection is not rival. Firefighters spend much of their time waiting for a fire, so protecting an extra house is unlikely to reduce the protection available to others. In other words, once a town has paid for the fire department, the additional cost of protecting one more house is small. In Chapter 15 we give a more complete definition of natural monopolies and study them in some detail. For both public goods and common resources, externalities arise because something of value has
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Chapter11micro - PUBLICGOODSANDCOMMONRESOURCES When a good...

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