•Free rider: a person who receives the benefit of a good but avoids paying for it •If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good. •Result: The good is not produced, even if buyers collectively value the good higher than the cost of providing it.
Public Goods•If the benefit of a public good exceeds the cost of providing it, government should provide the good and pay for it with a tax on people who benefit. •Problem: Measuring the benefit is usually difficult. •Some examples of public goods:•National defense •Knowledge created through basic research•Fighting poverty
Common Resources•Like public goods, common resources are not excludable .•Can’t prevent free riders from using•Little incentive for firms to provide•Role for govt: seeing that they are provided•Additional problem with common resources: rival in consumption Each person’s use reduces others’ ability to use•Role for govt: ensuring they are not overused•Some examples of common resources:•Clean air and water•Congested roads•Fish, whales, and other wildlife
The Tragedy of the Commons•A parable that illustrates why common resources get used more than is socially desirable.