Transcript Public Goods - lanfranconomics

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17
Public Goods and
Common Resources
After studying this chapter you 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
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Why don’t we let private firms produce weather forecasting,
national defence, or police services and sell their products
in the market?
What can be done to prevent the extinction of fish species
in the Atlantic Ocean resulting from overfishing?
These are the two big questions of this chapter.
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Classifying Goods and Resources
What Is a Public Good?
What is the essential difference between:
 A city police department and Brink’s security?
 Fish in the Atlantic Ocean and fish in a fish farm?
 A live concert and a concert on television?
These and all goods and services can be classified
according to whether they are excludable or
nonexcludable and rival or nonrival.
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Classifying Goods and Resources
Excludable
A good is excludable if only the people who pay for it are
able to enjoy its benefits.
Brink’s security services, Aquaculture’s Farm fish, and a
Coldplay concert are examples.
Nonexcludable
A good is nonexcludable if it is impossible (or extremely
costly) to prevent anyone from benefiting from it.
The services of the police, fish in the Pacific Ocean, and a
concert on network television are examples.
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Classifying Goods and Resources
Rival
A good is rival if one person’s use of it decreases the
quantity available for someone else.
A Brink’s truck can’t deliver cash to two banks at the same
time. A fish can be consumed only once.
Nonrival
A good is nonrival if one person’s use of it does not
decrease the quantity available for someone else.
The services of the police and a concert on network
television are nonrival.
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Classifying Goods and Resources
A Four-Fold Classification
Private Goods
A private good is both rival and excludable.
A can of Coke and a fish on Aquaculture’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 its benefits.
National defence is the best example of a public good.
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Classifying Goods and Resources
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.
They are nonexcludable because it is difficult to prevent
people from catching them.
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Classifying Goods and Resources
Natural Monopoly Goods
A natural monopoly good is nonrival and excludable.
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.
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Classifying Goods and Resources
Figure 17.1 shows
this four-fold
classification of
goods and
services.
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Public Goods
The Free-Rider Problem
A free rider enjoys the benefits of a good or service without
paying for it.
Because no one can be excluded from the benefits of a
public good, everyone has an incentive to free ride.
Public goods create a free-rider problem—the absence of
an incentive for people to pay for what they consume.
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Public Goods
The value of a private good is the maximum amount that a
person is willing to pay for one more unit of it.
The value of a public good is the maximum amount that
all the people are willing to pay for one more unit of it.
To calculate the value placed on a public good, we use
the concepts of total benefit and marginal benefit.
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Public Goods
Marginal Social Benefit of a Public Good
Total benefit is the dollar value that a person places on a
given quantity of a good.
The greater the quantity of a good, the larger is a person’s
total benefit.
Marginal benefit is the increase in total benefit that results
from a one-unit increase in the quantity of a good.
The marginal benefit of a public good diminishes with the
quantity of the good provided.
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Public Goods
Figure 17.2 shows that the
marginal social benefit of a
public good is the sum of
marginal benefits of
everyone at each quantity
of the good provided.
Part (a) shows Lisa’s
marginal benefit.
Part (b) shows Max’s
marginal benefit.
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Public Goods
The economy’s marginal
social benefit of a public
good is the sum of the
marginal benefits of all
individuals at each quantity
of the good provided.
The economy’s marginal
social benefit curve for a
public good is the vertical
sum of all individual
marginal benefit curves.
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Public Goods
The marginal social benefit
curve for a public good
contrasts with the demand
curve for a private good,
which is the horizontal sum
of the individual demand
curves at each price.
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Public Goods
The Marginal Social Cost of a Public Good
The marginal social cost of a public good is determined
in the same way as that of a private good.
The Efficient Quantity of a Public Good
The efficient quantity of a public good is the quantity that
at which marginal social benefit equals marginal social
cost.
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Public Goods
Figure 17.3 illustrates
the efficient quantity of
a public good.
With fewer than
2 satellites,
MSB exceeds MSC.
Resources a can be
used more efficiently by
increasing the quantity.
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Public Goods
With more than
2 satellites,
MSC exceeds MSB.
Resources can be used
more efficiently if fewer
satellites are provided.
So the quantity at which
MSB = MSC, resources
are used efficiently.
Private production would
produce 0 satellites.
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Public Goods
Inefficient Private Provision
If a private firm tried to produce and sell a public good,
almost no one would buy it.
The free-rider problem results in too little of the good
being produced.
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Public Goods
Efficient Public Provision
Because the government can tax all the consumers of the
public good and force everyone to pay for its provision,
public provision overcomes the free-rider problem.
If two political parties compete, each is driven to propose
the efficient quantity of a public good.
A party that proposes either too much or too little can be
beaten by one that proposes the efficient amount because
more people vote for an increase in net benefit.
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Public Goods
Figure 17.4 illustrates the
efficient political outcome.
Two parties, Blues and
Greens, agree on
everything except the
number of satellites.
If Blues propose 1 satellite
and Greens propose 3,
voters are equally unhappy
and the election is too
close to call.
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Public Goods
If Blues increase the
number of satellites to 2,
it will win the election if
Greens propose 3.
If Greens decrease the
number of satellites to 2,
it will win the election if
Blues propose 1.
Both parties propose 2
satellites and each party
gets 50 percent of the
votes.
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Public Goods
Principle of Minimum Differentiation
The attempt by politicians to appeal to a majority of voters
leads them to the same policies—an example of the
principle of minimum differentiation.
The principle of minimum differentiation is the
tendency for competitors to make themselves similar so
as to appeal to the maximum number of clients (voters).
(The same principle applies to competing firms such as
Tim Hortons and Starbucks).
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Public Goods
Inefficient Public Overprovision
If competition between two political parties is to deliver
the efficient quantity of a public good, bureaucrats
must cooperate and help achieve this outcome.
Objective of Bureaucrats
Bureaucrats want to maximize their department’s
budget.
A bigger budget increases their status and power.
Bureaucrats might try to persuade politicians to
provide more than the efficient quantity.
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Public Goods
Rational Ignorance
Rational ignorance is the decision by a voter not to
acquire information about a policy or provision of a public
good because the cost of doing so exceeds the expected
benefit.
For voters who consume but don’t produce a public good,
it is rational to be ignorant about the costs and benefit.
For voters who produce a public good, it is rational to be
well informed.
When the rationality of uninformed voters and special
interest groups is taken into account, the political
equilibrium results in overprovision of a public good.
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Public Goods
Figure 17.5 shows
bureaucratic overprovision.
If rationally ignorant voters
enable the bureaucrats to
achieve their goal of
maximizing their budget, …
public good might be
overprovided and …
and a deadweight loss
created.
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Public Goods
Two Types of Political Equilibrium
The two types of political equilibrium—efficient provision
and inefficient overprovision of public goods correspond to
two theories of government:
Social interest theory predicts that political equilibrium
achieves efficiency because well-informed voters refuse
to support inefficient policies.

Public choice theory predicts that government delivers
an inefficient allocation of resources—that government
failure parallels market failure.

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Public Goods
Why Government Is Large and Growing
Two possible reasons are

Voter preferences

Inefficient overprovision
Government grows because the voters’ demand for some
public goods is income elastic.
Inefficient overprovision might explain the size of
government but not its growth rate.
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Public Goods
Voters Strike Back
If government grows too large relative to the value voters
place on public goods, there might be a voter backlash
that leads politicians to propose smaller government.
Privatization is one way of coping with overgrown
government and is based on distinguishing between
public provision and public production of public goods.
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Common Resources
Overgrazing the pastures around villages in Middle-age
England and overfishing the cod stocks of the North
Atlantic Ocean during the recent past are tragedies of the
commons.
The tragedy of the commons is the absence of
incentives to prevent the overuse and depletion of a
commonly owned resource.
Examples include the Atlantic Ocean cod stocks, South
Pacific whales, and the quality of the earth’s atmosphere.
The traditional example from which the term derives is the
common grazing land surrounding middle-age villages.
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Common Resources
The tragedy of the commons is the overuse of a
common resource that arises when its users have no
incentive to conserve it and use it sustainably.
Examples include the overfishing of Atlantic Ocean cod
and South Pacific whales.
The traditional example from which the term derives is the
common grazing land surrounding middle-age British
villages.
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Common Resources
Sustainable Use of a Renewable Resource
Renewable resource is one that replenishes itself by
birth and growth of new members of the population.
Sustainable catch is the quantity of fish that can be
caught year after year without depleting the stock.
If the stock is small, the quantity of new fish born is
small, so the sustainable catch is small.
If the stock is large, many fish are born but they must
to complete for food …
so only a small number survive to reproduce and grow
large enough for fishers to catch.
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Common Resources
Figure 17.6 illustrates the
sustainable catch.
As the stock of fish
increases, the sustainable
catch increases.
Beyond that number, more
fish compete for food and
the sustainable catch falls.
If the catch exceeds the
sustainable catch, the fish
stock diminishes.
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Common Resources
The Overuse of a Common
Resource
Figure 17.7 shows why
overfishing occurs.
The supply is the marginal
private cost curve, MC.
The demand is the marginal
social benefit curve, MSB.
Market equilibrium occurs at
800,000 tonnes per year
and $10 a kilogram.
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Common Resources
The marginal social cost
curve is MSC.
The efficient quantity is
300,000 tonnes per year.
At the market equilibrium,
there is overfishing and a
deadweight loss arises.
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Common Resources
Achieving an Efficient Outcome
It is harder to achieve an efficient use of a common
resource than to define the conditions under which it
occurs.
The three main methods used to achieve the efficient use
of a common resource are
 Property rights
 Production quotas
 Individual transferable quotas (ITQs).
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Common Resources
Property Rights
By converting the common
resource to private
property, fishers face the
full social cost of their
actions.
The marginal social cost
curve becomes the supply
curve and the resource is
used efficiently.
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Common Resources
Production Quotas
By setting a production
quota at the efficient
quantity, the resource
might be used efficiently.
Figure 17.9 shows the
profit on the marginal
tonne of fish.
A fisher who cheats will
increase his profit. There is
an incentive to overfish.
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Common Resources
Individual Transferable Quotas
An individual transferable quota (ITQ) is a production
limit that is assigned to an individual who is free to
transfer (sell) the quota to someone else.
A market in ITQs emerges.
If the efficient quantity of ITQs is assigned, the market
price of an ITQ confronts resource users with a marginal
cost equal to MC + price of ITQ.
With MC + price of ITQ equal to MSB, the quantity
produced is efficient.
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Common Resources
Figure 17.10 shows the
situation with an efficient
number of ITQs.
The market price of an
ITQ increases the
marginal social cost to
MC + price of ITQ.
Users of the resource
make MSB equal
MC + price of ITQ, and
the outcome is efficient.
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