Title: Public goods and openaccess common property
1Public goods and open-access common property
2Outline
- Classification of goods private and public
- What public goods are, and why markets fail to
supply them - What common goods are, and why they are overused
- What public goods with exclusion (artificially
scarce goods) are, and why they are
under-consumed - How government intervention
3Characteristics of Goods
- Goods can be classified according to two
attributes - whether they are excludable and
- whether they are rival in consumption
- A good is excludable if the supplier of that good
can prevent people who do not pay from consuming
it. - A good is rival in consumption if the same unit
of the good cannot be consumed by more than one
person at the same time.
4Properties of Private goods
Rivalry If one individual use a good no other
can consume that specific good at the same time
(only one individual can write with a pen, only
one individual can eat a grape). Exclusion
Other individuals can be prevented from consuming
the good. However, there are goods characterized
by non-rivalry, non-excludability or both of
these characteristics.
5Properties of Public Goods
- Pure public goods share two characteristics
- Nonrival Cost of another person consuming the
good is zero - Nonexcludable Very expensive to prevent others
from consuming the good - Impure Public Goods
6Public Goods versus Private Goods
- Once a pure public good is supplied to one
individual, it is simultaneously supplied to all. - A private good is only supplied to the individual
who bought it.
7Government Provision of Public Goods
- Pure public goods are provided by government
because - For-profit private firms would find it difficult
to recover their costs of production. - Since the MC of serving additional users is zero
once the good has been produced, then charging
for the good would be inefficient.
8More examples
- Private goods
- Ice Cream
- Apple
- Coke
- Pen
-
- Public Goods
- National defense
- Clean Air
- Radio/TV station
- Cable TV
- Lighthouse
- Fireworks display
- Uncongested freeway
- Free Parks
9Four types of goods
- Private goods, which are excludable and rival in
consumption, like wheat - Public goods, which are nonexcludable and
nonrival in consumption, like a public sewer
system - Common resources, which are nonexcludable but
rival in consumption, like clean water in a river - Public goods with exclusion (artificially scarce
goods), which are excludable but nonrival in
consumption, like pay-per-view movies on cable TV
10Exclusion
No exclusion
Rivalry
No rivalry
111) Private Goods
A private good and service that is both rival
and excludable. It can be consumed by only one
person at a time and only by the person who has
bought it or owns it. A can of Coke is a private
goods. Only one person enjoys the benefits of a
single can of Coke, and everyone, except the
person who bought the can, is excluded from
consuming it.
122) Open-access common property and the tragic of
the commons
- It is more or less impossible to exclude people
from using some resources (roads, parks,
biodiversity, fishing waters). We call such goods
open-access common property. (rivalry but
non-excludable) - Individuals do not consider the total social cost
of their consumption. - Externality of consumption in the form of overuse
(e.g.congestion and extinction of species). - Open-access is the problem underlying
- the tragic of the commons.
13Examples open-access common property
- Common pools specific resources is shared by
more than one agent, e.g. water, oil and gas.
Competition empties the common pool faster than
what is optimal. -
- Fisheries No one owns a fish until its caught.
Overuse in this situation means that the harvest
rate of fish exceeds their growth rate (new born
fishes is fewer than the number of caught fishes)
gtFisheries creates a externality in terms of a
smaller fish population in the future. Extinction
of fish population. -
- Forests One problem in many developing
countries is deforestation. Trees are cut to
create agricultural land or to be used for
heating. Trees prevent flooding and soil-erosion,
i.e. over-harvesting is no good idea. - Internet if too many people try to enter a
public webpage at the same time the system gets
slow. -
- Roads To many cars on the same road leads to
congestion.
14Problem of overuse
- Common resources left to the free market suffer
from overuse a user depletes the amount of the
common resource available to others but does not
take this cost into account when deciding how
much to use the common resource. - In the case of a common resource, the marginal
social cost of my use of that resource is higher
than my individual marginal cost, the cost to me
of using an additional unit of the good. - The next slide illustrates this point
15What can be done to prevent overuse of open
access common properties?
MC,P
Suppose the MC of consumption is close to zero.
The marked area under the MCS-curve is an
efficiency loss because MWTPltMCS. Open access
leads to overuse (congestion, extinction,
clear-cut).
D
MCS
Extinction, Clear-cut
PS
Q
QS
MC
The government can solve the problem in at leased
two ways Regulate the use of the commons by a
quota equal to QS or a fee equal to PS.
(fish-quota, fish-permit) Assign private property
rights, i.e. covert common property into private
property. (private fish farms)