micro ch11 presentation

7/26/2019 Micro Ch11 Presentation

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2009 South-Western, a part of Cengage Learning, all rights reserved

C H A P T ER

Public Goods andPublic Goods andCommon ResourcesCommon Resources

MicroeonomicsP R I N C I P L E S O FP R I N C I P L E S O F

N. GregoryN. Gregory

MankiwMankiwPremium PowerPoint Slides

by Ron Cronovich

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In this chapter,In this chapter,look for the answers to theselook for the answers to thesequestions:questions:

What are public goods?What are common resources?Give examples of each.

Why do mar ets generally fail to provide theefficient amounts of these goods?

!ow might the government improve mar etoutcomes in the case of public goods or commonresources?

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PUBLIC GOODS AND COMMON RESOURCES "

IntroductionWe consume many goods without paying#par s$ national defense$ clean air % water.

When goods have no prices$ the mar et forcesthat normally allocate resources are absent.

&he private mar et may fail to provide thesocially efficient 'uantity of such goods.

(ne of the &en Principles from Chapter )#Governments can sometimesimprove market outcomes.


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PUBLIC GOODS AND COMMON RESOURCES *

Important Characteristics ofGoods

+ good is excludable if a person can be preventedfrom using it.

Excludable # fish tacos$ wireless internet accessNot excludable # ,- radio signals$ national defense

+ good is rival in consumption if one person suse of it diminishes others use.

Rival # fish tacos

Not rival # +n -P" file of /anye West s latest single


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PUBLIC GOODS AND COMMON RESOURCES 0

The Di erent inds of GoodsPrivate goods # excludable$ rival in consumption

1xample# food

Public goods # not excludable$ not rival1xample# national defense

Common resources # rival but not excludable1xample# fish in the ocean

Natural monopolies # excludable but not rival1xample# cable &2


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+ road is which of the four inds of goods?

Hint # &he answer depends on whether the roadis congested or not$ and whether it s a toll roador not. Consider the different cases.

A C T I E L E A R N I N GA C T I E L E A R N I N G 11

Cate!ori"in! roadsCate!ori"in! roads

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Rival in consumption? (nly if congested.

1xcludable? (nly if a toll road.

,our possibilities#3ncongested non4toll road# public good

3ncongested toll road# natural monopoly

Congested non4toll road# common resource

Congested toll road# private good


#nswers#nswers

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The Di erent inds of Goods&his chapter focuses on public goods andcommon resources.

,or both$ externalities arise because somethingof value has no price attached to it.

So$ private decisions about consumption andproduction can lead to an inefficient outcome.

Public policy can potentially raise economicwell4being.


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Public GoodsPublic goods are difficult for private mar ets toprovide because of the ree!rider "roble# .

Free rider # a person who receives the benefit ofa good but avoids paying for it

7f good is not excludable$ people have incentiveto be free riders$ because firms cannot preventnon4payers from consuming the good.

Result# &he good is not produced$ even ifbuyers collectively value the good higher thanthe cost of providing it.


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Public Goods7f the benefit of a public good exceeds the cost ofproviding it$ govt should provide the good and payfor it with a tax on people who benefit.

Problem# -easuring the benefit is usually difficult.

Cost-benefit analysis # a study that comparesthe costs and benefits of providing a public good

Cost4benefit analyses are imprecise$ so theefficient provision of public goods is more difficultthan that of private goods.


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PUBLIC GOODS AND COMMON RESOURCES ))

$ome Important Public Goods9ational defense

/nowledge created through basic research

,ighting poverty


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PUBLIC GOODS AND COMMON RESOURCES ):

Common Resources;i e public goods$ common resources are notexcludable.

Cannot prevent free riders from using;ittle incentive for firms to provide

Role for govt# seeing that they are provided +dditional problem with common resources#rival in consumption

1ach person s use reduces others abilityto useRole for govt# ensuring they are not overused


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PUBLIC GOODS AND COMMON RESOURCES )"

The Tra!ed% of the Commons + parable that illustrates why common resources

get used more than is socially desirable.Setting# a medieval town where sheep grausing it carefully .

Result# People can no longer raise sheep.


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PUBLIC GOODS AND COMMON RESOURCES )*

The Tra!ed% of the Commons&he tragedy is due to an externality#

+llowing one s floc to gra


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What could the townspeople>or their governmenthave done to prevent the tragedy?

&ry to thin of two or three options.


Polic% options for commonPolic% options for common

resourcesresources

#$


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7mpose a corrective tax on the use of the landto @internalithe @command4and4controlA approach .

+uction off permits allowing use of the land.

Bivide the land$ sell lots to individual familieseach family will have incentive not to overgra


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PUBLIC GOODS AND COMMON RESOURCES )D

Polic% &ptions to Pre'ent&'erconsumption of Common

ResourcesRegulate use of the resource7mpose a corrective tax to internali


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PUBLIC GOODS AND COMMON RESOURCES )5

$ome Important CommonResources

Clean air and water

Congested roads

,ish$ whales$ and other wildlife


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PUBLIC GOODS AND COMMON RESOURCES )6

C#$( $T)D*:+*ou 'e Got

$pam-.Some firms use spam emailsto advertise their products.Spam is not excludable #,irms cannot be preventedfrom spamming.

Spam is rival # +s morecompanies use spam$ it becomes less effective.

&hus$ spam is a common resource .

;i e most common resources$ spam is overused Ewhich is why we get so much of itF

$S"a#% e#ail i& na#eda ter ever'one(&

avorite delicac')


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PUBLIC GOODS AND COMMON RESOURCES :8

C&/C0)$I&/Public goods tend to be under4provided$ whilecommon resources tend to be over4consumed.

&hese problems arise because property rightsare not well4established#

9obody owns the air$ so no one can chargepolluters. Result# too much pollution.9obody can charge people who benefit fromnational defense. Result# too little defense.

&he govt can potentially solve these problemswith appropriate policies.


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C1#PT(R $)22#R* C1#PT(R $)22#R*

+ good is excludable if someone can be preventedfrom using it. + good is rival in consumption if oneperson s use reduces others ability to use thesame unit of the good.

-ar ets wor best for private goods$which are excludable and rival in consumption.-ar ets do not wor well for other types of goods.

2#


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C1#PT(R $)22#R* C1#PT(R $)22#R*

Public goods$ such as national defense andfundamental nowledge$ are neither excludablenor rival in consumption.

ecause people do not have to pay to use them$they have an incentive to free ride$ and firms haveno incentive to provide them.

&herefore$ the government provides public goods$using cost4benefit analysis to determine how muchto provide.

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C1#PT(R $)22#R* C1#PT(R $)22#R*

Common resources are rival in consumption butnot excludable. 1xamples include commongra

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