The History of Nanotechnology

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Microeconomics 1
Lecturer: Adam Allanson Lecture 21
18 April 2013

Public Goods & Common Resources
GKM Chapter 11 Case Studies 4.5 & 4.6

Today’s Learning Objectives
1. Define public goods and common resources.
2. Understand how public goods and common resources can lead to market failure:  public goods will be under-provided due to the “free rider problem”

 common resources will be over-used
3. Understand how the market and/or government may seek to address this.

Four categories of goods
Goods can be categorised on the basis of whether they are excludable and rival in consumption. • Excludable: other people can be prevented from using the good. • Rival in consumption: one person’s use of the good diminishes other people’s use. There are four categories of goods: private; public; club; and common resources.

Four categories of goods

GKM Figure 11.1

Rival in consumption? Yes No Private goods • Ice creams Yes • Clothing • Congested toll roads

Excludable? No

1. Private good: A good or service that is both excludable and rival in consumption.

Four categories of goods

GKM Figure 11.1

Rival in consumption? Yes No Private goods • Icecreams Yes • Clothing • Congested toll roads

Excludable? No

Public goods • National defence • Knowledge

• Uncongested non-toll roads
2. Public good: A good or service which: (1) an additional consumer does not ‘use up’ or prevent another’s use of it; and (2) no one can be excluded from consuming the good or service. It is neither excludable or rival in consumption.

Four categories of goods

GKM Figure 11.1

Rival in consumption? Yes No Private goods • Icecreams Yes • Clothing • Congested toll roads

Excludable?

Common resources • Fish in ocean No • The environment
• Congested non-toll roads

Public goods • National defence • Knowledge

• Uncongested non-toll roads

3. Common resource: A good where no one can be denied access to the resource, but one person’s use of the resource reduces the possible use by others. The good is rival in consumption, but not excludable.

Four categories of goods

GKM Figure 11.1

Rival in consumption? Yes No Private goods Club goods • Icecreams • Fire protection Yes • Clothing • Cable TV • Congested toll roads Excludable? Common resources • Fish in ocean No • The environment • Congested non-toll roads

• Uncongested toll roads

Public goods • National defence • Knowledge

• Uncongested non-toll roads

4. Club good: A good that is excludable, but not rival in consumption.

Four categories of goods

GKM Figure 11.1

Rival in consumption? Yes No Private goods Club goods • Icecreams • Fire protection Yes • Clothing • Cable TV • Congested toll roads Excludable? Common resources • Fish in ocean No • The environment • Congested non-toll roads

• Uncongested toll roads

Public goods • National defence • Knowledge

• Uncongested non-toll roads

Today we are focusing on goods which are not excludable; this means that it is difficult to make people pay for them.

Public Goods, Common Resources: types of externalities
• The provision of a public good gives rise to a positive externality: other people are made better off but they do not have to pay for this benefit. ⇒ the market provides inefficiently low levels of public goods

• The consumption of a common resource gives rise to a negative externality: other people are worse off but they are not compensated for their loss. ⇒ the market consumption levels are inefficiently high

Public Goods and the Free Rider Problem

Public Goods and the Free Rider Problem
New Year’s Eve fireworks in Smalltown are a public good: • residents cannot be excluded from watching (non-excludable); and • one resident watching the fireworks does not prevent anyone else watching them (non-rival in consumption).

Suppose that: Smalltown has 500 residents and they each place $10 value on experience of New Year’s Eve fireworks; and it costs...
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