Public Goods and Common Resources

1
Public Goods and Common Resources
2
Public Goods and Common Resources

• We examine the problems that arise for free
  goods/ goods with out market prices.
• Since there is no price attached to the good,
  market failure can result in the production and
  consumption of the commodity.

3
Public Goods and Common Resources Outline

• Different types of goods and examples
• Characteristics of public goods and problems
• CBA
• Common resources and tragedy of the commons
• Property rights and market failure

4
The Different Kinds of Goods

• Two characteristics of goods
• Excludability the property of a good whereby a
  person can be prevented from using it
• Rivalry the property of a good whereby one
  persons use diminishes other peoples use
• Four groups of goods
• Private goods both excludable and rival
• Public goods neither excludable nor rival
• Common resources rival but not excludable
• Natural monopoly Excludable but not rival

5
Public Goods and Common Resources

• Externalities arise in case of public goods and
  common resources since both are not excludable
• Due to the presence of externalities, government
  intervention can raise economic well-being
• Free- rider problem is associated with public
  goods since they are neither rival nor excludable
  

6
Public Goods and Free-Rider Problem

• Free-rider is a person who receives the benefit
  of the good and avoids paying for it
• Free-rider problem prevents the market from
  supplying public goods
• Important public goods include- defence, police
  protection, basic research, poverty alleviation
• Cost-benefit analysis compares the costs and
  benefits to society of providing a public good

7
Common Resources

• Problems associated with cost-benefit analysis ??
  
• Tragedy of the commons is a parable that
  illustrates why common resources get used more
  than is socially desirable
• Important common resources include- environment,
  oil pools, congested roads, wildlife

8
Conclusion

• In the absence of property rights, market fails
  to allocate resources efficiently
• Government, through the right policy mix, can
  potentially solve the problem and increase
  economic well-being

9
Mid-Term Exam 2 Review Feb 27, 2004

• Email ramanik_at_uvic.ca
• Your questions/ concerns/ doubts for mid-term 2.
  
• Suggestions/ Major concerns regarding teaching,
  course content, labs.
• If you have any issues regarding the syllabus
  covered so far, please see me/ email me
  immediately.

10
Problem on Externalities

• There are three industrial firms in Happy Valley
• Firm Initial pollution level Cost of
  reducing pollution by one
  unit
• A 70 units 20
• B 80 25
• C 50 10

11
Problem on Externalities

• The government wants to reduce pollution to 120
  units, so it gives each firm 40 tradable
  pollution permits.
• Who sells permits, and how many do they sell? Who
  buys permits, and how many do they buy? What is
  the total cost of pollution reduction in this
  situation? Briefly explain why the sellers and
  buyers are each willing to do so?
• How much higher would the costs of pollution
  reduction be if the permits could not be traded?