Common Resources & Public vs. Private Goods

Chapter 11

Reading: Tragedy of the Commons

Excludable & Rival Goods

Rival Goods- consumption by one person reduces quantity available for others consumers

Excludable Goods- consumer who can not pay are excluded from consuming/using it…..

Common Resources

• Common Resources – are commonly owned resources– Example: fish in ocean, the environment

– They are non-excludable & rival in consumption

• Tragedy of the Commons- the absence of incentives to prevent “overuse” & depletion of a common resource

Private Goods

• Private Goods• Goods that are both excludable & rival in consumption

Private Goods: Food, Coffee, airline tickets, automobiles, etc…

End Result: Goods/Services are allocated efficiently based on MB ≥ MC

Public Goods

• Public Goods• Goods that are neither excludable nor rival in consumption

Public Goods: police protection, radio signals, national defense, public roads, Fireworks, etc….

End Result: many consumers get public goods without paying for them…

Problems with Public Goods• Free-rider Effect- a person who receives the benefit of a

good but avoids paying for it

• Examples:

– “Slacker” in group work at school

– Volunteers for neighborhood cleanup

– Fundraising for Fire Department

– Not paying taxes

Public Good Efficiency

• When goods are available free of charge => market forces will not allocate resources efficiently

• Government should collect taxes & provide public goods whenever Total Benefits ≥ Total Costs

• Examples:

– National Defense

– Basic Research

– Fighting Poverty

– Fireworks on 4th of July

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Private Goods, Public Goods & Common Resources

Allocated Efficiently: MB ≥ MC

Leads to overuse/depletion

Gov’t should provide if TB ≥ TC leads to “free rider” problem

Tragedy of Commons Practice Test