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• “The best things in life are free. . .” – Free goods provide a special challenge for – Most goods in our economy are allocated in • When goods are available free of charge, the market forces that normally allocate resources in our economy are absent.
• When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in the proper amounts.
• In such cases, government policy can potentially remedy the market failure that results, and raise economic well-being.
• When thinking about the various goods in the economy, it is useful to group them according to two characteristics: – refers to the property of a good whereby a person – refers to the property of a good whereby one person’s use diminishes other people’s use.
• Goods that are both excludable and rival in consumption • Goods that are neither excludable nor rival in consumption • Goods that are rival in consumption but not excludable • Goods that are excludable but not rival in consumption Figure 1 Four Types of Goods
Excludable?
• A free-rider is a person who receives the benefit of a good but avoids paying for it.
The Free-Rider Problem
• Since people cannot be excluded from enjoying the benefits of a public good, individuals may withhold paying for the good hoping that others will pay for it.
• The free-rider problem prevents private markets The Free-Rider Problem
• The government can decide to provide the public good if the total benefits exceed the costs.
• The government can make everyone better off by providing the public good and paying for it with tax revenue.
Some Important Public Goods
CASE STUDY: Are Lighthouses Public
Goods?
• Benefit is neither excludable nor rival in consumption • Because of free-rider problem, private • markets generally don’t provide lighthouses • 19th century England, lighthouse owners • If port didn’t pay, light turned off The Difficult Job of Cost-Benefit Analysis
• Cost-benefit analysis refers to a study that compares the costs and benefits to society of providing a public good.
• In order to decide whether to provide a public good or not, the total benefits of all those who use the good must be compared to the costs of providing and maintaining the public good.
The Difficult Job of Cost-Benefit Analysis
• A cost-benefit analysis would be used to estimate the total costs and benefits of the project to society as a whole.
• It is difficult to do because of the absence of prices needed to estimate social benefits and resource costs.
• Without accurate prices, it is difficult to assess • the value of life• the value of consumers’ time, and • the aesthetics of public good projects.
• Common resources, like public goods, are not excludable. They are available free of charge to anyone who wishes to use them.
• Common resources are rival goods because one person’s use of the common resource reduces other people’s use.
Tragedy of the Commons
• The Tragedy of the Commons is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.
• Common resources tend to be used excessively when individuals are not charged for their usage. • This is similar to a negative externality.
Some Important Common Resources
IN THE NEWS: A Solution to City
Congestion
• Motorists driving into central London on weekdays between 7:00 A.M. and 6:30 P.M. pay a daily tax of about $9.50.
• Cameras record license plate numbers and nonpayers are charged stiff penalties.
• Congestion in central London has decreased by • 50,000 fewer cars enter the eight square mile CASE STUDY: Why the Cow Is Not Extinct
Ownership and
the Profit
IN THE NEWS: Should Yellowstone
Charge as Much as Disney World?
• National parks can be viewed as either public • If park congestion is light, visits are not rival in • As congestion increases, park entrance fees • could be used to improve national parks, and • would encourage others to develop new parks.
CONCLUSION: THE IMPORTANCE OF PROPERTY RIGHTS • The market fails to allocate resources efficiently when property rights are not well-established (i.e. some item of value does not have an owner with the legal authority to control it).
• When the absence of property rights causes a market failure, the government can potentially solve the problem.
• Goods differ in whether they are excludable – A good is excludable if it is possible to prevent – A good is rival if one person’s enjoyment of the good prevents other people from enjoying the same unit of the good.
• Public goods are neither rival nor excludable.
• Because people are not charged for their use of public goods, they have an incentive to free ride when the good is provided privately.
• Governments provide public goods, making quantity decisions based upon cost-benefit analysis.
• Common resources are rival but not excludable.
• Because people are not charged for their use of common resources, they tend to use them excessively.
• Governments tend to try to limit the use of

Source: http://eco.nuaa.edu.cn/upload/files/OPT11_4E.pdf