PUBLIC GOODS AND Chapter 11
COMMON RESOURCES Kanika Talwar
SGTB Khalsa College
INTRODUCTION
oIn the previous chapter we studied how under externalities government intervention
leads to a better solution rather than private markets .
oIn this chapter we will study yet another reason why markets fail and government
intervention may be a better solution.
oThere are some goods which can’t be provided in the private market due to their
inherent nature. These are called public goods or common resources.
oThe government needs to provide for them
oeg: defence, street lights, roads , parks etc
PUBLIC GOODS
Two Features
Non- excludable Non- rival
When you cannot exclude When consumption by one
anyone from using it person does not decrease the
consumption of the other person
COMMON RESOURCES
Common Resources are non excludable but rival.
For example if two people are fishing in a pond fish caught by one will reduce the
catch of the other person but since its common to all no one can be excludable.
NATURAL MONOPOLY
Sometimes the goods are excludable but non-rival.
For example fire extinguisher. Saving one house does not reduce the welfare of the
other house but it is excludable in the sense that those who pay for it have access to it
TYPES OF GOODS
PUBLIC GOODS & FREE RIDER PROBLEM
To understand how public goods differ from other goods and what problems they
present for society, let’s consider an example: a fireworks display.
The citizens of Smalltown, U.S.A., like seeing fireworks on the Fourth of July.
Each of the town’s 500 residents places a $10 value on the experience. The cost of putting on
a fireworks display is $1,000. Because the $5,000 of benefits exceed the $1,000 of costs, it
is efficient for Smalltown residents to see fireworks on the Fourth of July.
Would the private market produce the efficient outcome? Probably not. Imagine that Ellen, a
Smalltown entrepreneur, decided to put on a fireworks display. Ellen would surely have trouble
selling tickets to the event because her potential customers would quickly figure out that they
could see the fireworks even without a ticket. Fireworks are not excludable, so people have an
incentive to be free riders.
A free rider is a person who receives the benefit of a good but avoids paying for it.
One way to view this market failure is that it arises because of an externality those
who saw the display without paying for it.
When deciding whether to put on the display, Ellen ignores these external benefits.
Even though a fireworks display is socially desirable, it is not privately profitable. As
a result, Ellen makes the socially inefficient decision not to put on the display.
Although the private market fails to supply the fireworks display demanded by
Smalltown residents, the solution to Smalltown’s problem is obvious:
The local government can sponsor a Fourth of July celebration. The town council can raise everyone’s
taxes by $2 and use the revenue to hire Ellen to produce the fireworks. Everyone in Smalltown is better
off by $8—the $10 in value from the fireworks minus the $2 tax bill.
Ellen can help Smalltown reach the efficient outcome as a public employee even though she could not
do so as a private entrepreneur.
SOME IMPORTANT PUBLIC GOODS
National Defense
Basic research
Fighting Poverty
EXAMPLE WHEN PUBLIC GOODS CAN BECOME
PRIVATE GOODS
Fireworks
Lighthouse
Limited membership of clubs
THE DIFFICULT JOB OF COST-BENEFIT ANALYSIS
Cost-benefit analysis : a study that compares the costs and benefits to society of providing a public
good.
Suppose the government wants to build a highway. To judge whether to build the highway, it must
compare the total benefits of all those who would use it to the costs of building and maintaining it.
Cost-benefit analysts have a tough job. Because the highway will be available to everyone free of
charge, there is no price with which to judge the value of the highway.
Simply asking people how much they would value the highway is not reliable.
First, quantifying benefits is difficult using the results from a questionnaire.
Second, respondents have little incentive to tell the truth. Those who would use the highway have an incentive to exaggerate
the benefit they receive to get the highway built. Those who would be harmed by the highway have an incentive to
exaggerate the costs to them to prevent the highway from being built.
The efficient provision of public goods is, therefore, intrinsically more difficult than the efficient
provision of private goods.
COMMON RESOURCES & TRAGEDY OF THE
COMMONS
Common resources, like public goods, are not excludable: They are available free of charge
to anyone who wants to use them. Common resources are, however, rival One person’s use of
the common resource reduces other people’s enjoyment of it.
Thus, common resources give rise to a new problem called the Tragedy of the Commons.
Tragedy of the Commons is a a parable that illustrates why common resources get used more
than is desirable from the standpoint of society as a whole.
Few example of tragedy of the commons is :
1. Over Fishing in Ocean
2. Over grazing of fields
3. Littering and Dumping
SOME IMPORTANT COMMON RESOURCES
1. Clean Air and Water
2. Oil Pools
3. Congested Roads
4. Fish , Whales and other wildlife
5. National Parks can be either public goods or common resources
COW VS ELEPHANT
It is common fact that both cows and elephants are hunted due to their commercial value.
However not all animals with commercial values are at the brink of extinction.
The cow is a valuable source of food. The great demand for beef seems to ensure that the
species will continue to thrive.
However the elephants tusk have so much commercial value that there is excessive poaching
which lead to reduction of the species.
Now the question rises that why is the commercial value of ivory a threat to the elephant, while
the commercial value of beef is a guardian of the cow?
The reason is that elephants are a common resource, whereas cows are a private good.
Elephants roam freely without any owners. Each poacher has a strong incentive to kill as many
elephants as he can find. Because poachers are numerous, each poacher has only a slight
incentive to preserve the elephant population. By contrast, cows live on ranches that are
privately owned. Each rancher takes great effort to maintain the cow population on his ranch
because he reaps the benefit of these efforts.