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Unformatted text preview: 9160335_CH15_p335-350.qxp 6/22/09 9:07 AM Page 335 15 Public Goods and Common
Resources After studying this chapter,
y ou will be able to:
■ Distinguish among private goods, public goods, and common resources ■ Explain how the free-rider problem arises and how the
quantity of public goods is determined ■ Explain the tragedy of the commons and its possible
solutions What’s the difference between the Los Angeles Police
Department and Brinks Security, between fish in the Pacific
Ocean and fish produced by a Seattle fish farm, and between a
live U2 concert and a show on network television?
Why does government provide some goods and services such
as the enforcement of law and order and national defense? Why
don’t we let private firms produce these items and let people buy
the quantities that they demand in the marketplace? Is the scale of species? Must the price of fish inevitably keep rising? What provision of these government-provided services correct? Or do can be done to conserve the world’s fish stocks? governments produce either too much or too little of these items? These are the questions that we study in this chapter. We More and more people with ever-increasing incomes demand begin by classifying goods and resources. We then explain ever greater quantities of most goods and services. One of these what determines the scale of government provision of public items is fish grown wild in the ocean. The fish stocks of the services. Finally, we study the tragedy of the commons. In world’s oceans are not owned by anyone. They are common Reading Between the Lines at the end of the chapter, we resources, and everyone is free to use them. Are our fish stocks look at a pressing tragedy of the commons in the world being overused? Are we in danger of bringing extinction to some today: the problem of overuse of the tropical rainforests. 335 9160335_CH15_p335-350.qxp 336 6/22/09 9:07 AM Page 336 CHAPTER 15 Public Goods and Common Resources ◆ Classifying Goods and Resources
Goods, services, and resources differ in the extent to
which people can be excluded from consuming them
and in the extent to which one person’s consumption rivals the consumption of others. FIGURE 15.1 Private goods Rival
A good is rival if one person’s use of it decreases the
quantity available for someone else. A Brinks’s truck
can’t deliver cash to two banks at the same time. A
fish can be consumed only once.
A good is nonrival if one person’s use of it does not
decrease the quantity available for someone else. The
services of the LAPD and a concert on network television are nonrival. One person’s benefit doesn’t lower
the benefit of others. A Fourfold Classification
Figure 15.1 classifies goods, services, and resources
into four types.
Private Goods A private good is both rival and
excludable. A can of Coke and a fish on East Point
Seafood’s farm are examples of private goods.
Public Goods A public good is both nonrival and
nonexcludable. A public good can be consumed
simultaneously by everyone, and no one can be
excluded from enjoying its benefits. National defense
is the best example of a public good.
Common Resources A common resource is rival and
nonexcludable. A unit of a common resource can be
used only once, but no one can be prevented from
using what is available. Ocean fish are a common
resource. They are rival because a fish taken by one
person isn’t available for anyone else, and they are
nonexcludable because it is difficult to prevent people
from catching them. Common resources Food and drink Fish in ocean Car Atmosphere House Rival Excludable
A good is excludable if it is possible to prevent someone from enjoying its benefits. Brinks’s security
services, East Point Seafood’s fish, and a U2 concert
are examples. People must pay to consume them.
A good is nonexcludable if it is impossible (or
extremely costly) to prevent anyone from benefiting
from it. The services of the LAPD, fish in the Pacific
Ocean, and a concert on network television are
examples. When an LAPD cruiser enforces the speed
limit, everyone on the highway benefits; anyone with
a boat can fish in the ocean; and anyone with a TV
can watch a network broadcast. Fourfold Classification of
Goods National parks Natural monopolies Public goods Internet National defense Cable television The law Bridge or tunnel Nonrival Air traffic control Excludable Nonexcludable A private good is one for which consumption is rival and
from which consumers can be excluded. A public good is
one for which consumption is nonrival and from which it is
impossible to exclude a consumer. A common resource is
one that is rival but nonexcludable. A good that is nonrival
but excludable is produced by a natural monopoly.
animation Natural Monopolies In a natural monopoly, economies of scale exist over the entire range of output for which there is a demand (see p. 246). A special case of natural monopoly arises when the good or
service can be produced at zero marginal cost. Such a
good is nonrival. If it is also excludable, it is produced by a natural monopoly. The Internet and cable
television are examples. Review Quiz ◆
2 Distinguish among public goods, private goods,
common resources, and natural monopolies.
Provide examples of goods (or services or
resources) in each of the four categories that
differ from the examples in this section.
Work Study Plan 15.1
and get instant feedback. ◆ Public Goods
Why does the U.S. government provide our national
defense? Why don’t we buy our national defense
from North Pole Protection, Inc., a private firm that
competes for our dollars in the marketplace in the
same way that McDonald’s does? The answer is that 9160335_CH15_p335-350.qxp 6/22/09 9:07 AM Page 337 Public Goods Marginal Social Benefit of a Public Good
Lisa and Max (the only people in an imagined society) value national defense. Figures 15.2(a) and
15.2(b) graph their marginal benefits from a defense
satellite system as MBL for Lisa and MBM for Max. A
person’s marginal benefit from a public good, like that
from a private good, diminishes as the quantity of the
good increases—the marginal benefit curves slope
Figure 15.2(c) shows the marginal social benefit
curve, MSB. Because everyone gets the same quantity
of a public good, its marginal social benefit curve is the
sum of the marginal benefits of all individuals at each
quantity—it is the vertical sum of the individual marginal benefit curves. So the curve MSB in part (c) is
the marginal social benefit curve for the economy
made up of Lisa and Max. For each satellite, Lisa’s
marginal benefit is added to Max’s marginal benefit.
Contrast the marginal social benefit curve for a
public good with that of a private good. To obtain the
marginal social benefit curve for a private good, we
sum the quantities demanded by all individuals at each
price—we sum the individual marginal benefit curves
horizontally (see Chapter 5, p. 105). Marginal Social Cost of a Public Good
The marginal social cost of a public good is determined
in exactly the same way as that of a private good—see
p. 111. The principle of increasing marginal cost applies
to the marginal cost of a public good and the marginal
social cost curve of a public good slopes upward. Efficient Quantity of a Public Good
To determine the efficient quantity of a public good, we
use the same principles that you learned in Chapter 5 Marginal benefit
(dollars per satellite) A free rider enjoys the benefits of a good or service
without paying for it. Because a public good is provided for everyone to use and no one can be
excluded from its benefits, no one has an incentive
to pay his or her share of the cost. Everyone has an
incentive to free ride. The free-rider problem is that
the market would provide an inefficiently small
quantity of a public good. Marginal social benefit
from the public good would exceed its marginal
social cost and a deadweight loss would arise.
Let’s look at the marginal social benefit and marginal social cost of a public good. Benefits of a Public Good 80
20 MB L
0 1 2
Quantity (number of satellites) (a) Lisa's marginal benefit
(dollars per satellite) The Free-Rider Problem FIGURE 15.2 60
20 0 MB M
Quantity (number of satellites) (b) Max's marginal benefit Marginal benefit
(dollars per satellite) national defense is a public good—nonexcludable
and nonrival—and it has a free-rider problem. 337 140
60 Lisa 40
Max 20 0 MSB 1 2
Quantity (number of satellites) (c) Economy’s marginal social benefit The marginal social benefit at each quantity of the public
good is the sum of the marginal benefits of all individuals.
The marginal benefit curves are MBL for Lisa and MBM for
Max. The economy’s marginal social benefit curve is MSB.
animation 9160335_CH15_p335-350.qxp 338 6/22/09 9:07 AM Page 338 CHAPTER 15 Public Goods and Common Resources and have used repeatedly: Find the quantity at which
marginal social benefit equals marginal social cost.
Figure 15.3 shows the marginal social benefit curve,
MSB, and the marginal social cost curve, MSC, for
defense satellites. (We’ll now think of society as consisting of Lisa and Max and 300 million others.)
If marginal social benefit exceeds marginal social
cost, as it does when fewer than 2 satellites are provided, resources can be used more efficiently by increasing the quantity. The extra benefit exceeds the extra
cost. If marginal social cost exceeds marginal social benefit, as it does when more than 2 satellites are provided,
resources can be used more efficiently by decreasing the
quantity. The saving in cost exceeds the loss of benefit.
If marginal social benefit equals marginal social
cost, as it does when exactly 2 satellites are provided,
resources cannot be used more efficiently. To provide
more than 2 satellites would cost more than the additional coverage is worth, and to provide fewer satellites
lowers the benefit by more than its cost saving.
Resources are allocated efficiently. Inefficient Private Provision
Could a private firm—North Pole Protection, Inc.—
deliver the efficient quantity of satellites? Most likely, it
The Efficient Quantity of a
Public Good Marginal cost and marginal benefit
(billions of dollars per satellite) FIGURE 15.3 30 25 MSC 20 MSC < MSB MSC > MSB 10 0 Private
2 MSB 3
Quantity (number of satellites) With fewer than 2 satellites, marginal social benefit, MSB,
exceeds marginal social cost, MSC. With more than 2 satellites, MSC exceeds MSB. Only with 2 satellites is MSC
equal to MSB and the quantity is efficient.
animation ◆ Common Resources
Atlantic Ocean cod stocks have been declining since the
1950s, and some marine biologists fear that this species
is in danger of becoming extinct in some regions. The
whale population of the South Pacific has been declining also, and some groups are lobbying to establish a
whale sanctuary in the waters around Australia and
New Zealand to regenerate the population.
Logging, cattle-ranching, mining, oil extraction, and
damming rivers are destroying the tropical rainforests
of Southeast Asia, Africa, and Central and South
America at an alarming rate. At the present rate of
destruction, most will be gone by 2030.
These situations involve common property, and
the problem that we have identified is called the
tragedy of the commons. The Tragedy of the Commons MSC = MSB 15 5 couldn’t because no one would have an incentive to
buy his or her share of the satellite system. Everyone
would reason as follows: “The number of satellites provided by North Pole Protection, Inc., is not affected by
my decision to pay my share or not. But my own private consumption will be greater if I free ride and do
not pay my share of the cost of the satellite system. If I
don’t pay, I enjoy the same level of security and I can
buy more private goods. I will spend my money on private goods and free ride on the public good.” Such reasoning is the free-rider problem. If everyone reasons the
same way, North Pole Protection, Inc., has no revenue
and so provides no satellites. Because the efficient level
is two satellites, private provision is inefficient. The tragedy of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource. If no one owns a resource,
no one considers the effects of her or his use of the
resource on others.
The Original Tragedy of the Commons The term “tragedy of the commons” comes from fourteenth century England, where areas of rough grassland surrounded villages. The commons were open to all and
used for grazing cows and sheep owned by the villagers.
Because the commons were open to all, no one
had an incentive to ensure that the land was not
over grazed. The result was a severe overgrazing situation. Because the commons were overgrazed, the
quantity of cows and sheep that they could feed
kept falling. 9160335_CH15_p335-350.qxp 6/22/09 9:07 AM Page 339 Common Resources During the sixteenth century, the price of wool
increased and England became a wool exporter to the
world. Sheep farming became profitable, and sheep
owners wanted to gain more effective control of the
land they used. So the commons were gradually privatized and enclosed. Overgrazing ended, and land
use became more efficient.
A Tragedy of the Commons Today One of today’s pressing tragedies of the commons is overfishing. To
study the tragedy of the commons, let's look at what
has been happening to Atlantic Cod—just one
species of fish that has been seriously overfished. Sustainable Production
Sustainable production is the rate of production that
can be maintained indefinitely. In the case of ocean
fish, the sustainable production is the quantity of fish
(of a given species) that can be caught each year into
the indefinite future without wiping out the species.
This production rate depends on the existing stock
of fish and the number of boats that go fishing. For a
Sustainable Production: Total,
Average, and Marginal Catch
catch given stock of fish, sending more boats to sea
increases the quantity of fish caught. But sending too
many boats to sea depletes the stock.
So as the number of boats increases, the quantity
of fish caught increases as long as the stock is maintained. But above some crucial level, as more boats go
fishing, the stock of fish decreases and the number of
fish caught also decreases.
Table 15.1 provides some numbers that illustrate
the relationship between the number of boats that go
fishing and the quantity of fish caught. The numbers
in this example are hypothetical.
Total Catch The total catch is the sustainable rate of
production. The numbers in the first two columns of
Table 15.4 show the relationship between the number of fishing boats and the total catch, and Fig. 15.4
illustrates this relationship.
You can see that as the number of boats increases
from zero to 5,000, the sustainable catch increases to
a maximum of 250,000 tons a month. As the number of boats increases above 5,000, the sustainable
catch begins to decrease. By the time 10,000 boats
are fishing, the fish stock is depleted to the point at
which no fish can be caught. Marginal
catch Boats (thousands of (tons per (tons per (thousands) tons per month) boat) boat) A 0
1 C 2 D 3 E 4 F 5 G 6 H 7 I 8 J 9 K 10 .........
0 . . . . . . . 90 B 0
0 . . . . . . . 70
. . . . . . . 50
. . . . . . . 30
. . . . . . . 10
. . . . . . 10
. . . . . . 30 Sustainable Production of Fish FIGURE 15.4
Sustainable catch (thousands of tons per month) TABLE 15.1 339 Overfishing 250 200
catch 150 100 50 . . . . . . 50
. . . . . . 70 0 1 2 3 4 . . . . . . 90 As the number of fishing boats increases, the quantity
of fish caught increases up to the maximum sustainable
catch and then decreases. The average catch and marginal catch decrease as the number of boats increases. 5 6 7 8
Boats (thousands) As the number of boats increases, the sustainable catch
increases up to a maximum. Beyond that number, more
boats will diminish the fish stock and the sustainable catch
decreases. Overfishing occurs when the maximum sustainable catch decreases.
animation 9160335_CH15_p335-350.qxp 9:07 AM Page 340 CHAPTER 15 Public Goods and Common Resources With more than 5,000 boats, there is overfishing.
Overfishing arises if the number of boats increases to
the point at which the fish stock begins to fall and
the remaining fish are harder to find and catch.
Average Catch The average catch is the catch per boat and equals the total catch divided by the number of boats. The numbers in the third column of
Table 15.1 show the average catch.
With 1,000 boats, the total catch is 90,000 tons
and the catch per boat is 90 tons. With 2,000 boats,
the total catch is 160,000 tons, and the catch per
boat is 80 tons. As more boats take to the ocean, the
catch per boat decreases. By the time 8,000 boats are
fishing, each boat is catching just 20 tons a month.
The decreasing average catch is an example of the
principle of diminishing returns.
Marginal Catch The marginal catch is the change in
the total catch that occurs when one more boat joins
the existing number. It is calculated as the change in
the total catch divided by the increase in the number
of boats. The numbers in the fourth column of
Table 15.1 show the marginal catch.
For example, in rows C and D of the table, when
the number of boats increases by 1,000, the catch
increases by 50,000 tons, so the increase in the catch
per boat equals 50 tons. In the table, we place this
amount midway between the two rows because it is
the marginal catch at 2,500 boats, midway between
the two levels that we used to calculate it.
Notice that the marginal catch, like the average
catch, decreases as the number of boats increases.
Also notice that the marginal catch is always less than
the average catch.
When the number of boats reaches that at which the
sustainable catch is a maximum, the marginal catch is
zero. At a larger number of boats, the marginal catch
becomes negative—more boats decrease the total catch. An Overfishing Equilibrium
The tragedy of the commons is that common
resources are overused. Why might the fish stock be
overused? Why might overfishing occur? Why isn’t
the maximum number of boats that take to the sea
the number that maximizes the sustainable catch—
5,000 in this example?
To answer this question, we need to look at the
marginal cost and marginal private benefit to an individual fisher.
Suppose that the marginal cost of a fishing boat is
the equivalent of 20 tons of fish a month. That is, to cover the opportunity cost of maintaining and operating a boat, the boat must catch 20 tons of fish a
month. This quantity of fish also provides the boat
owner with normal profit (part of the cost of operating the boat), so the boat owner is willing to go
The marginal private benefit of operating a boat
is the quantity of fish the boat can catch. This quantity is the average catch that we’ve just calculated.
The average catch is the marginal private benefit
because that is the quantity of fish that the boat
owner gets by taking the boat to sea.
The boat owner will go fishing as long as the average catch (marginal private benefit) exceeds the marginal cost. And the boat owner will maximize profit
when marginal private benefit equals marginal cost.
Figure 15.5 shows the marginal cost curve, MC,
and the marginal private benefit curve, MB. The MB
curve is based on the numbers for the average catch
in Table 15.1.
You can see in Fig. 15.5 that with fewer than
8,000 boats, each boat catches more fish than it costs
to catch them. Because boat owners can gain from
fishing, the number of boats is 8,000 and there is an
Sustainable catch per boat (tons per month) 340 6/22/09 Why Overfishing Occurs 100
equilibrium Marginal cost
per boat 40 MC 20 MB
0 1 2 3 4 5 6 7 8
Boats (thousands) The average catch decreases as the number of boats
increases. The average catch per boat is the marginal private
benefit, MB, of a boat. The marginal cost of a boat is equivalent to 20 tons of fish, shown by the curve MC. The equilibrium number of boats is 8,000—an overfishing equilibrium.
animation 9160335_CH15_p335-350.qxp 6/22/09 9:07 AM Page 341 C ommon Resources If one boat owner stopped fishing, the overfishing
would be less severe. But that boat owner would be
giving up an opportunity to earn an economic profit.
The self-interest of the boat owner is to fish, but
the social interest is to limit fishing. The quantity of
fish caught by each boat decreases as additional boats
go fishing. But when individual boat owners are
deciding whether to fish, they ignore this decrease.
They consider only the marginal private benefit. The
result is an inefficient overuse of the resource. Sustainable catch per boat (tons per month) F IGURE 15.6 The Efficient Use of the Commons
What is the efficient use of a common resource? It is
the use of the resource that makes the marginal cost
of using the resource equal to the marginal social
benefit from its use.
a boat is the boat’s marginal catch—the increase in the
total catch that results from an additional boat. The
reason is that when an additional boat puts to sea, it
catches the average catch but it decreases the average
catch for itself and for every other boat. The marginal
social benefit is the increase in the quantity of fish caught
per boat, not the average number of fish caught.
We calculated the marginal catch in Table 15.1
and we repeat part of that table for convenience in
Fig. 15.6. The figure also shows the marginal private
benefit curve, MB, and the marginal social benefit
Notice that at any given number of boats, marginal
social benefit is less than marginal private benefit. Each
boat benefits privately from the average catch, but the
addition of one more boat decreases the catch of every
boat, and this decrease must be subtracted from the
catch of the additional boat to determine the social
benefit from the additional boat.
Efficient Use With no external costs, the marginal social cost equals marginal cost. In Fig. 15.6, the
marginal cost curve is also the marginal social cost
curve, MC MSC. Efficiency is achieved when MSB
equals MSC with 4,000 boats, each catching 60 tons
of fish a month. You can see in the table that when
the number of boats increases from 3,000 to 4,000
(with 3,500 being the midpoint), marginal social
benefit is 30 tons, which exceeds marginal social cost.
When the number of boats increases from 4,000 to
5,000 (with 4,500 being the midpoint), marginal
social benefit is 10 tons, which is less than marginal
social cost. At 4,000 boats, marginal social benefit is
20 tons, which equals marginal social cost. Efficient Use of a
Common Resource 100 Efficient
use 80 60 40 Marginal
benefit MC = MSC 20 MSB
0 Marginal Social Benefit The marginal social benefit of 341 1 2 3 4 Total
Boats (thousands of 5 MB
6 7 Marginal
benefit (thousands) tons per month) 8
Boats (thousands) Marginal
benefit (tons per boat) A 0 0 B 1 90 90 C 2 160 80 D 3 210 70 E 4 240 60 F 5 250 50 . . . . . . . . . . . . . . . . . . . . 90
. . . . . . . . . . . . . . . . . . . . 70
. . . . . . . . . . . . . . . . . . . . 50
. . . . . . . . . . . . . . . . . . . . 30
. . . . . . . . . . . . . . . . . . . . 10 The marginal social benefit of a fishing boat is the change
in total benefit that results from an additional boat. The
table shows that when the number of boats increases from
2,000 to 3,000 (from row C to row D ), the total catch
increases from 160,000 to 210,000 tons a month and marginal catch and marginal social benefit is 50 tons.
The figure graphs the marginal social benefit curve,
MSB, and the marginal private benefit curve, MB. Marginal
social benefit is less than marginal private benefit and
decreases as the number of boats increases. The efficient
number of boats is 4,000—the number at which marginal
social benefit equals marginal social cost of 20 tons per
month. The common resource is used efficiently.
animation 9160335_CH15_p335-350.qxp 9:07 AM Page 342 CHAPTER 15 Public Goods and Common Resources Achieving an Efficient Outcome
Defining the conditions under which a common
resource is used efficiently is easier than generating
those conditions. To use a common resource efficiently,
it is necessary to design an incentive mechanism that
confronts the users of the resource with the marginal
social consequences of their actions. The same principles apply to common resources as those that you met
when you studied externalities in Chapter 14.
Three main methods might be used to achieve the
efficient use of a common resource. They are
■ Property rights
Individual transferable quotas (ITQs) Property Rights A common resource that no one
owns and that anyone is free to use contrasts with
private property, which is a resource that someone
owns and has an incentive to use in the way that
maximizes its value. One way of overcoming the
tragedy of the commons is to remove the commons
and make the resource private property. By assigning
private property rights, each owner faces the same
conditions as society faces. The MSB curve of
Fig. 15.6 becomes the marginal private benefit curve,
and the use of the resource is efficient.
The private property solution to the tragedy of the
commons is available in some cases. It was the solution
to the original tragedy of the commons in England’s
Middle Ages. It is also a solution that has been used to
prevent overuse of the airwaves that carry our cell
phone service. The right to use this space—called the
frequency spectrum—has been auctioned by governments to the highest bidders, and the owner of a particular part of the spectrum is the only one permitted
to use it (or to license someone else to use it).
But assigning private property rights is not always
feasible. It would be difficult, for example, to assign
private property rights to the oceans. It would not be
impossible, but the cost of enforcing private property
rights over thousands of square miles of ocean would
be high. And it would be even more difficult to assign
and protect private property rights to the atmosphere.
In some cases, there is an emotional objection to
assigning private property rights. When private property rights are too costly to assign and enforce, some
form of government intervention is used, and production quotas are the simplest.
Production Quotas You studied the effects of a pro- duction quota in Chapter 6 (pp. 137–138) and learned that a quota can drive a wedge between marginal social benefit and marginal social cost and create
deadweight loss. In that earlier example, the market
was efficient without a quota. But in the case of the
use of a common resource, the market is inefficient. It
is overproducing, so a quota that limits production can
bring a move toward a more efficient outcome.
A quota might be placed either on the number of
boats or on the catch. In our example, the catch is
determined by the number of boats, so placing a
quota on the number of boats is equivalent to placing
a quota on the catch. We’ll define the quota in terms
of the number of boats permitted to fish.
Figure 15.7 shows a quota that achieves an efficient
outcome. The quota limits the number of boats to
4,000, the number that catches the efficient quantity
at which marginal social benefit, MSB, equals marginal
social cost, MSC. If the boats allocated the right to fish
are the only ones to do so, the outcome is efficient.
Implementing a production quota has two problems. First, it is in every boat owner’s self-interest to
cheat and send out more boats than the number permitted. The reason is that marginal private benefit
exceeds marginal cost, so by using more boats, each
boat owner gets a higher income. If enough boat
A Production Quota to Use
a Common Resource Efficiently FIGURE 15.7 Sustainable catch per boat (tons per month) 342 6/22/09 Quota on
boats 100 80
outcome 60 40 MC = MSC 20 MSB
0 1 2 3 4 5 MB
6 7 8
Boats (thousands) A quota on the number of boats permitted to fish is set at
4,000, the number that catches the quantity of fish at which
marginal social benefit, MSB, equals marginal social cost,
MSC. If the quota is successfully enforced, the outcome is
animation 9160335_CH15_p335-350.qxp 6/22/09 9:07 AM Page 343 Common Resources Individual Transferable Quotas Where producers are difficult to monitor or where marginal costs differ
across producers, a more sophisticated quota system
can be effective. It is an individual transferable quota
(ITQ), which is a production limit that is assigned to
an individual who is then free to transfer (sell) the
quota to someone else. A market in ITQs emerges
and ITQs are traded at their market price.
The market price of an ITQ is the highest price
that someone is willing to pay for one. That price is
marginal benefit minus marginal cost. The price of
an ITQ will rise to this level because the boat owners
who don’t have a quota would be willing to pay this
amount to get one.
A boat owner with an ITQ could sell it for the
market price, so by not selling the ITQ the boat
owner incurs an opportunity cost. The marginal cost
of fishing, which now includes the opportunity cost
of the ITQ, equals the marginal social benefit of the
Figure 15.8 illustrates how ITQs work. Each boat
has a marginal cost equivalent to 20 tons per month.
The efficient outcome is achieved with 4,000 boats,
each catching 60 tons per month. The market price of
an ITQ equals the equivalent of 40 tons of fish per
month. The marginal cost of fishing rises from MC0 to
MC0 + price of ITQ, 4,000 boats go fishing, and each
boat catches 60 tons of fish. The outcome is efficient.
Individual differences in marginal cost do not prevent an ITQ system from delivering the efficient
outcome. Boat owners with a low marginal cost are
willing and able to pay more for a quota than are
boat owners with a high marginal cost. The market FIGURE 15.8
Sustainable catch per boat (tons per month) owners break the quota, overfishing returns and the
tragedy of the commons remains.
Second, marginal cost is not, in general, the same
for all producers—as we’re assuming here. Some producers have a comparative advantage in using a
resource. Efficiency requires that the quota be allocated
to the producers with the lowest marginal cost. But the
government department that allocates quotas does not
have information about the marginal cost of individual
producers. Even if the government tried to get this
information, producers would have an incentive to lie
about their costs so as to get a bigger quota.
So a production quota can work, but only if the
activities of every producer can be monitored and all
producers have the same marginal cost. Where producers are difficult or very costly to monitor or where
marginal costs vary across producers, a production
quota cannot achieve an efficient outcome. 343 ITQs to Use a Common
Resource Efficiently 100 Efficient
outcome 80 MC0 + price of ITQ 60
of an ITQ 40 MC0 20 MB
0 1 2 3 4 5 6 7 8
Boats (thousands) ITQs are issued on a scale that keeps output at the efficient
level. The market price of an ITQ equals the marginal private benefit minus marginal cost. Because each user of the
common resource faces the opportunity cost of using the
resource, self-interest achieves the social interest.
animation price of an ITQ will equal 60 tons minus the marginal cost of the marginal producer. Boat owners
with higher marginal costs will not go fishing. Review Quiz ◆
3 What is the tragedy of the commons? Give two
examples, including one from your state.
Describe the conditions under which a common resource is used efficiently.
Review three methods that might achieve the
efficient use of a common resource and explain
the obstacles to efficiency.
Work Study Plan 15.3
and get instant feedback. ◆ Reading Between the Lines on pp. 344–345 looks
at the overuse of tropical rainforests.
The next chapter begins a new part of your study
of microeconomics and examines the third big question of economics: For whom are goods and services
produced? We examine the markets for factors of production and discover how wage rates and other
incomes are determined. 9160335_CH15_p335-350.qxp 6/22/09 9:07 AM Page 344 READING BETWEEN THE LINES Rainforests: A Tragedy of the Commons
Puerto Rico Rainforest on Edge
April 23, 2006 The scent of flowering tropical plants fills the moist air amid a chorus of whistling birds and
singing frogs. The only other sound for a mile in any direction is the roar of a 100-foot waterfall.
Despite 28,000 acres of such lovely scenes, the tropical rainforest that Puerto Rico’s prehistoric Taino Indians called El Yunque, or “Land of the White Clouds,” is in grave danger.
Thousands of acres of forests and green lands ... are being cleared at a torrid pace. ...
There are consequences to clearing these lands, beyond harm to hundreds of rare plants and
wildlife in El Yunque. The rainforest ... provides one-third of the island’s fresh drinking water. ...
Tropical forests such as El Yunque constitute about 6% of Earth’s surface and account for
50% to 80% of the world’s plant species. Rainforests once covered 14% of the planet’s land
surface, but have shrunk due to development and deforestation. ...
“I’d like to think we live in harmony with El Yunque,” said Martha Herrera, 69, who bought
a two-story house next to the rainforest a decade ago.
“Some people say I’m hurting El Yunque. But how am I hurting anything?” she asked as her
three dogs and flock of chickens roamed in and out of the park one recent morning.
About a quarter-mile away, construction crews were pouring concrete as they rushed to finish
a 20-acre condominium complex.
“People who buy these units want the views of the rainforest,” said Hecter Ramirez, 35, a
construction worker at the site. “I have a job. That’s important to my family and me. People
tell me this isn’t going to damage anything.”
El Yunque is home to 240 native tree species—more than any other national forest. Federally listed endangered plants grow in the forest too, such as the miniature orchid and palo de jazmin. ...
© 2006 The Los Angeles Times via Tribune Media Services. All Rights Reserved. Reprinted with permission. Essence of the Story
■ Puerto Rico’s El Yunque tropical rainforest has 240 native tree species—more than any other national forest. ■ Puerto Rico’s tropical rainforest is being cleared at a
torrid pace. ■ Tropical forests, which have shrunk from 14 percent
to 6 percent of Earth’s surface, account for 50 to
80 percent of the world’s plant species. ■ Condominium construction is taking place close to the
rainforest. ■ ■ The rainforest near San Juan provides one third of the
island’s fresh drinking water. Construction workers and people who buy condominiums say they aren’t doing any damage. 344 6/22/09 9:07 AM Page 345 Economic Analysis
■ The tropical rainforests of Puerto Rico grow on land
that some people want to build on. ■ These forests are home to many rare species of tree, a
source of drinking water, and a carbon-dioxide sink
that helps to maintain Earth’s atmosphere. ■ The forests are common property. ■ The private incentive to exploit these forest resources is
strong. ■ Sustainable production (tons per year) 9160335_CH15_p335-350.qxp Maximum sustainable
production in self-interest
with private ownership Because no one owns the forests, there is no incentive
to conserve the resources and use them on a sustainable basis. Depletion in
common property The result is overuse, just like the overuse of the commons of England in the Middle Ages. ■ The figures illustrate the tragedy of the commons in a
tropical rainforest. ■ Figure 1 shows the relationship between the sustainable production of wood from a rainforest and the
number of lumber producers working the forest. ■ Figure 2 shows the marginal private benefit and marginal private cost of a producer and the marginal social benefit and marginal social cost of wood. ■ The producer’s marginal cost of felling a tree is assumed to be zero. ■ For a common resource, the marginal private benefit
received by a producer is MB and LD lumber producers acting in their self-interest deplete the resource.
Sustainable production decreases to zero. ■ For a privately owned resource, the marginal social
benefit curve, MSB, becomes the marginal private benefit curve. Self-interest results in LP lumber producers
who maximize the sustainable output of the rainforest. ■ If the only benefit from the rainforest were its timber,
maximum sustainable timber output would be efficient. ■ Lumber producers
Figure 1 Rainforest timber production MSB = MSC MB = 0
MSC 0 LS LP
MSB = 0 MC
Lumber producers MSB Figure 2 Marginal benefits and marginal costs But external benefits arise from the diversity of the
wildlife supported by the forest, so marginal social cost
exceeds the zero marginal private cost. ■ 0 Marginal social benefit and cost (dollars per ton) ■ Efficient
interest Production in the social interest—the efficient level of
production—is achieved with LS lumber producers and
is less than the maximum sustainable production. 345 9160335_CH15_p335-350.qxp 346 6/22/09 9:07 AM Page 346 CHAPTER 15 Public Goods and Common Resources SUMMARY ◆ Key Points
Classifying Goods and Resources (p. 336)
■ ■ ■ A private good is a good or service that is rival and
A public good is a good or service that is nonrival
A common resource is a resource that is rival but
nonexcludable. Public Goods (pp. 336–338)
■ ■ ■ ■ Common Resources (pp. 338–343)
■ Because a public good is a good or service that is
nonrival and nonexcludable, it creates a free-rider
problem: No one has an incentive to pay their
share of the cost of providing a public good.
The efficient level of provision of a public good is
that at which marginal social benefit equals marginal social cost.
Competition between political parties, each of
which tries to appeal to the maximum number of voters, can lead to the efficient scale of provision
of a public good and to both parties proposing
the same policies—the principle of minimum
Bureaucrats try to maximize their budgets, and if
voters are rationally ignorant, public goods might
be provided in quantities that exceed those that are
efficient. ■ ■ Common resources create a problem that is called
the tragedy of the commons—no one has a private
incentive to conserve the resources and use them
at an efficient rate.
A common resource is used to the point at which
the marginal private benefit equals the marginal
A common resource might be used efficiently by
creating a private property right, setting a quota,
or issuing individual transferable quotas. Key Figures
Figure 15.3 Fourfold Classification of Goods, 336
Benefits of a Public Good, 337
The Efficient Quantity of a Public
Good, 338 Figure 15.5
Figure 15.6 Why Overfishing Occurs, 340
Efficient Use of a Common
Resource, 341 Key Terms
Common resource, 336
Free-rider problem, 337
quota (ITQ), 342 Nonexcludable, 336
Private good, 336 Public good, 336
Tragedy of the commons, 338 9160335_CH15_p335-350.qxp 6/22/09 9:07 AM Page 347 P roblems and Applications PROBLEMS and APPLICATIONS 347 ◆ Work problems 1–7 in Chapter 15 Study Plan and get instant feedback.
Work problems 8–16 as Homework, a Quiz, or a Test if assigned by your instructor. Marginal social benefit and marginal social cost
(dollars per person) 1. Classify each of the following items as excludable, nonexcludable, rival, nonrival, a public
good, a private good, or a common resource.
■ Gettysburg National Military Park
■ A Big Mac
■ Brooklyn Bridge
■ The Statue of Liberty
■ Police protection
■ U.S. Postal Service
■ FedEx courier service
■ The MyEconLab Web site
2. For each of the following goods, explain whether
there is a free-rider problem. If there is no such
problem, how is it avoided?
■ July 4th fireworks display
■ Interstate 81 in Virginia
■ Wireless Internet access in hotels
■ Sharing downloaded music
■ The public library in your city
3. The figure provides information about a sewage
disposal system that a city of 1 million people is
MSC 100 80 60 40 20 MSB
0 1 2 3 4 5 Capacity (millions of gallons per day) a. What is the capacity that achieves an efficient
b. How much will each person have to pay in
taxes to pay for the efficient capacity level?
c. What is the political equilibrium if voters are
well informed? d. What is the political equilibrium if voters are
rationally ignorant and bureaucrats achieve
the highest attainable budget?
4. The table shows the value of cod caught in the
North Atlantic Ocean by American, Canadian,
and European fishing boats. The marginal cost of
operating a boat is $80,000 a month.
c od caught
b oats 0
70 (thousands of
dollars per month) 0
1,400 a. What is the marginal private benefit of a fishing boat at each quantity of boats?
b. What is the marginal social benefit of a fishing
boat at each quantity of boats?
c. With no regulation of cod fishing, what is the
equilibrium number of boats and the value of
d. Is the equilibrium in c an overfishing
e. What is the efficient number of boats?
f. What is the efficient value of the cod catch?
g. Do you think that the consumers of fish and
the fishing industry will agree about how
much cod should be caught?
h. If the United States, Canada, and the
European Union imposed a production quota
to limit the catch to the efficient quantity,
what would the total value of the catch be
under the quota?
i. If the United States, Canada, and the
European Union issued ITQs to fishing
boats to limit the catch to the efficient
quantity, at what price would ITQs be
traded? 9160335_CH15_p335-350.qxp 348 6/22/09 CHAPTER 15 9:07 AM Page 348 Public Goods and Common Resources 5. “Free Riders” Must be Part of Health Debate
[Barack] Obama insists that “the reason people
don’t have health insurance isn’t because they
don’t want it, it’s because they can’t afford it. …”
A free rider is someone who can afford a health
insurance policy but won’t buy any. Obama
wants to give Americans the freedom to not buy
insurance but the right to get government-subsidized coverage when they get sick.
The inevitable result is that a lot of healthy people will avoid contributing to the insurance
pool. … Why should they buy insurance at any
price if they can glom on to a government program should disaster strike? There are 47 million
uninsured people in the United States, and
16 percent have a family income above $75,000.
Another 15 percent make between $50,000 and
$75,000. … About 16 percent of the patients
who received “free” medical care in 2004 came
from families making at least four times the federal poverty level. … They racked up $5.8 billion
in uncompensated care, which others had to pay
Los Angeles Times, March 4, 2008
a. Explain why government-subsidized coverage
can create a free-rider problem in the healthcare market.
b. Explain the evidence this article presents to
contradict the argument that “the reason people
don’t have health insurance isn’t because they
don’t want it, it’s because they can’t afford it.”
6. The Wonder Fish
Our oceans are being drained of food. Doctors
tell us to eat more fish. … To meet this growing
appetite, commercial fishermen are scooping up
everything that’s edible (and a lot of what’s not).
Couple that trend with the effects of global
warming, and the situation has become so dire
that some scientists think seafood stocks will
totally collapse by 2048. … A former fisheries
researcher in the Cook Islands, [Kona Blue
cofounder Neil] Sims was disgusted by how
locals ravaged marine life there. But the scene
also inspired his idea for a new (patents pending) style of deepwater fish farming. … So just
what is Kona Kampachi? Think of it as a more versatile cousin of hamachi. It’s not genetically
engineered in any way, just well bred. … Sims
fastidiously controls every variable in the life of a
fish. Kona Blue houses 150 brood stock on shore
a few miles north of Kona. These breeders are
continually refreshed with deep-ocean water and
left to do nothing but eat, swim, and procreate.
Every few days a female lays as many as 300,000
eggs, which are harvested and transferred to a
nursery. … When the fish reach an inch in
length, they head to the ocean. In the wild the
survival of two eggs would ensure sustainability
for the species. Kona Blue does far better. “We
get survival rates of 5% to 10%,” says Sims.
Fortune, April 21, 2008
a. Why is the fish stock being overused?
b. How does Kona Blue help prevent overfishing,
while at the same time allowing a greater
amount of fish to be caught?
c. Use a model of the sustainable production of
fish to illustrate your explanation.
d. Draw a graph to illustrate your answers to b
7. A Bridge Too Far Gone
The gas taxes that paid for much of America’s
post-war freeway system have been eaten away by
inflation and higher fuel efficiency. The federal
tax has not been raised since 1993. California’s
18-cent tax has remained unchanged since 1994.
Motorists now pay about one-third in gas taxes
to drive a mile as they did in the early 1960s. Yet
raising such taxes is politically tricky. This would
matter less if private cash was flooding into infrastructure, or if new ways were being found to
control demand. Neither is happening. … A new
toll road in Texas, which is being built by a
Spanish company, raised howls of outrage.
The Economist, August 9, 2007
a. Why is it “politically tricky” to raise gas taxes
to finance infrastructure?
b. What in this news clip points to a distinction
between public production of a public good
and public provision? Give examples of three
public goods that are produced by private firms
but provided by government and paid for with
taxes. 9160335_CH15_p335-350.qxp 6/22/09 9:07 AM Page 349 P roblems and Applications 8. For each of the following goods, explain whether
there is a free-rider problem. If there is no such
problem, how is it avoided?
■ Fire protection
■ New Year’s Eve celebrations in Times Square,
■ Interstate 80 in rural Wyoming
■ The Grand Canyon
■ Street lighting in urban areas
■ Flood control in the Mississippi watershed
■ The beach at Santa Monica
9. The table provides information about a mosquito
per day) Marginal
social cost Marginal
social benefit (dollars per day) 0
a. What quantity of spraying would a private
mosquito control program provide?
b. What is the efficient quantity of spraying?
c. Two political parties, the Conservers and the
Eradicators, fight an election in which the only
issue is the quantity of spraying to undertake.
The Conservers want no spraying and the
Eradicators want to spray 5 square miles per
day. The voters are well-informed about the
benefits and costs of mosquito control programs. What is the outcome of the election?
d. Draw a graph to illustrate the outcome of the
10. In problem 9, the government sets up a
Mosquito Control Unit and appoints a bureaucrat to run the department.
a. Would the mosquito spraying most likely be
underprovided, overprovided, or provided at
the efficient quantity?
b. How do rational voters behave and why do
they enable bureaucrats to behave in the way
you described in a?
c. Draw a graph to illustrate the outcome when
bureaucrats achieve their objective. 349 11. An oil reserve runs under plots of land owned by
seven people. Each person has the right to sink a
well on her or his land and take oil from the
reserve. The amount of oil that is produced
depends on the number of wells sunk and is
shown in the table. The marginal private cost of
a well is the equivalent of 4 gallons a day.
wells Oil output
(gallons per day) 0
a. What is the marginal private benefit at each
quantity of wells?
b. What are the equilibrium number of wells and
quantity of oil produced?
c. What is the marginal social benefit at each
quantity of wells?
d. What are the efficient number of wells and
quantity of oil to produce?
e. If the common reserve were owned by only
one person, how many wells would be sunk
and how much oil would be produced?
f. How much would someone offer the seven owners to rent the rights to all the oil in the common
reserve? (Use gallons of oil as the unit.)
12. If hikers and others were required to pay a fee to
use the Appalachian Trail,
a. Would the use of this common resource be
b. Would it be even more efficient if the most
popular spots had the highest prices?
c. Why do you think we don’t see more market
solutions to the tragedy of the commons?
13. Who’s Hiding under Our Umbrella?
Students of the Cold War learn that, to deter possible Soviet aggression, the United States placed a
“strategic umbrella” over NATO Europe and
Japan, declaring it would fight if their independence was threatened by the Soviet Union. …
European and Japanese allies have been taking 9160335_CH15_p335-350.qxp 350 6/22/09 CHAPTER 15 9:07 AM Page 350 Public Goods and Common Resources economic advantage of the fact that the United
States was providing for most of their own
Under President Ronald Reagan, approximately
6 percent of the GDP of the United States was
spent on defense, whereas the Europeans tended
to spend only 2 to 3 percent and the Japanese a
miserly 1 percent, although all faced a common
enemy. Thus the American taxpayer bore a disproportionate burden for the overall defense
spending, whereas those sheltering under its
umbrella spent more on social or consumer
goods, or saved while the U.S. went further into
Today, the United States, like Rome and Britain
in their time, is the provider of international
public goods. …
International Herald Tribune, January 30, 2008
a. Explain the free-rider problem described in
this news clip.
b. Does the free-rider problem in international
defense mean that the world has too little defense against aggression?
c. How do nations try to overcome the free-rider
problem among nations?
14. Commuting More than Pain at Pump
… [T]he daily drive causes a large number of
commuters everything from increased stress and
anger to sleep deprivation and loss of productivity at work. … Nearly half (45 percent) of the
4,091 respondents polled in 10 major metropolitan areas said that traffic congestion increased
their stress levels. Another 28 percent said it
heightened their feelings of anger. Almost one in
five said commuting problems cut down on their
productivity at work and in school and a full
12 percent said they were sleep deprived. … The
two biggest culprits: start-and-stop traffic and
Because traffic delays are typically random, commuters have to budget a larger amount of time to
get from here to there. … [IBM’s Institute for
Electronic Government] has been devising ways
to help cities deal with increased traffic congestion, and has helped deploy automated tolling,
congestion pricing plans and real-time traffic
modeling in cities such as Brisbane, London,
Singapore and Stockholm. … To help alleviate traffic problems, drivers said
they wanted more options to work from home,
improved public transportation, and better road
CNN, May 30, 2008
a. Are congested public roadways excludable or
nonexcludable and rival or nonrival? Explain.
b. As a result of this classification, explain the
problem associated with congested public
roadways that results in an inefficient usage.
c. Draw a graph to illustrate the inefficient equilibrium.
d. How could government policies be used to
achieve an efficient usage of roadways?
15. Where the Tuna Roam
… to the first settlers, the Great Plains posed the
same problem as the oceans today: It was a vast,
open area where there seemed to be no way to
protect animals against relentless human predators. … But animals thrived in the West once the
settlers divvied up the land and ingeniously
devised new ways to protect their livestock. …
Today the ocean is still pretty much an open
range, and the fish are suffering the consequences. … Fishermen have a personal incentive
to make as much as they can this year, even if
they’re destroying their own profession in the
process. They figure any fish they don’t take for
themselves will just be taken by someone else. …
The New York Times, November 4, 2006
a. What are the similarities between the problems
faced by the earliest settlers in the West and
b. Can the tragedy of the commons in the oceans
be eliminated in the same manner used by the
early settlers on the plains?
c. How can ITQs change the short-term outlook
of fishers to a long-term outlook?
16. After you have studied Reading Between the Lines
on pp. 344–345, answer the following questions:
a. What is happening in Puerto Rico that is
causing the depletion of the country’s tropical
b. How would the creation of private property
rights in Puerto Rico’s rainforests change the
way in which the forest resources are used?
c. Would private ownership solve all the problems of resource overuse? If not, why not? ...
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This note was uploaded on 02/07/2010 for the course ECON 251 taught by Professor Blanchard during the Fall '08 term at Purdue University-West Lafayette.
- Fall '08