chapter 11 - Chapter Introduction Public Goods and Common...

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Unformatted text preview: Chapter Introduction Public Goods and Common Resources An old song lyric maintains that "the best things in life are free." A moment's thought reveals a long list of goods that the songwriter could have had in mind. Nature provides some of them, such as rivers, mountains, beaches, lakes, and oceans. The government provides others, such as playgrounds, parks, and parades. In each case, people do not pay a fee when they choose to enjoy the benefit of the good. Goods without prices provide a special challenge for economic analysis. Most goods in our economy are allocated in markets, where buyers pay for what they receive and sellers are paid for what they provide. For these goods, prices are the signals that guide the decisions of buyers and sellers, and these decisions lead to an efficient allocation of resources. When goods are available free of charge, however, the market forces that normally allocate resources in our economy are absent. In this chapter, we examine the problems that arise for the allocation of resources when there are goods without market prices. Our analysis will shed light on one of the Ten Principles of Economics in Chapter 1: Governments can sometimes improve market outcomes. 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. 11-1 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. As we discussed in Chapter 7, a market can provide the efficient number of ice-cream cones: The price of ice-cream cones adjusts to balance supply and demand, and this equilibrium maximizes the sum of producer and consumer surplus. Yet as we discussed in Chapter 10, the market cannot be counted on to prevent aluminum manufacturers from polluting the air we breathe: Buyers and sellers in a market typically do not take into account the external effects of their decisions. Thus, markets work well when the good is ice cream, but they work badly when the good is clean air. In thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the good excludable? That is, can people be prevented from using the good? Is the good rival in consumption? That is, does one person's use of the good reduce another person's ability to use it? Using these two characteristics, Figure 1 divides goods into four categories: Private goods are both excludable and rival in consumption. 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 coneyou just don't give it to him. An ice-cream cone is rival in consumption 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 cone, another person cannot eat the same cone....
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This note was uploaded on 07/14/2011 for the course ECO 1001 taught by Professor Barcia during the Spring '08 term at CUNY Baruch.

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chapter 11 - Chapter Introduction Public Goods and Common...

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