1. Definition of excludability: the property of a good whereby a person can be prevented from using it. 2. Definition of rivalry in consumption: the property of a good whereby one person’s use diminishes other people’s use . B. Using these two characteristics, goods can be divided into four categories. 1. Definition of private goods: goods that are both excludable and rival in consumption . 2. Definition of public goods: goods that are neither excludable nor rival in consumption. 3. Definition of common resources: goods that are rival in consumption but not excludable. 4. Definition of club goods: goods that are excludable but not rival in consumption . C. The boundary between the categories is sometimes fuzzy. Whether goods are excludable or rival in consumption is often a matter of degree. Rival in consumption? Yes No Excludable? Yes Private Goods § ice-cream cones § clothing § congested toll roads Club Goods § fire protection § cable TV § uncongested toll roads No Common Resources § fish in the ocean § the environment § congested nontoll roads Public Goods § national defense § knowledge § uncongested nontoll roads II. Public Goods A. The Free-Rider Problem 1. Definition of free rider: a person who receives the benefit of a good but avoids paying for it. 2. More than likely, private individuals or firms will not produce the fireworks show because it would not be profitable. 3. If the social value of the fireworks show is greater than the cost of producing it, it would be efficient for the fireworks show to be produced. a. The local government can sponsor the show and charge each of its citizens with part of the cost (in the form of a tax). b. If the tax is less than the value of the fireworks display to each individual, everyone is better off. B. The Difficult Job of Cost–Benefit Analysis
1. To decide whether or not it should fund a public good, the government must conduct a study of the total benefits and costs of the good. 2. Definition of cost-benefit analysis: a study that compares the costs and benefits to society of providing a public good. 3. This is very difficult to do, because measuring how much individuals will value a specific good is problematic. a. Quantifying benefits is difficult using the results from a questionnaire. b. Respondents have little incentive to tell the truth. 4. This difficulty implies that the efficient supply of public goods is much more challenging than the efficient supply of private goods, because buyers of the private good reveal its value to the sellers. III. Common Resources A. Common resources are not excludable, but they are rival in consumption. This implies that policymakers need to be concerned about how much is used. B. The Tragedy of the Commons Definition of the Tragedy of the Commons: a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole. C. Some Important Common Resources 1. Clean air and water 2. Congested roads 3. Fish, Whales, and Other Wildlife IV. Conclusion: The Importance of Property Rights A. With both public goods and common resources, the market outcome will be inefficient because of the lack of well-defined property rights. B. This absence of property rights can lead to a market failure, which implies that in these situations, governments can improve the allocation of resources and increase economic well-being.
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- Fall '12
- Pollution, Market failure, Externality, tradable pollution permits