10/22/2017

N. GREGORY MANKIW Look for the answers to these questions: PRINCIPLES OF ECONOMICS • What are public goods? Eight Edition • What are common resources? Give examples of each. • Why do markets generally fail to provide the CHAPTER Public Goods and efficient amounts of these goods? • How might the government improve market 11 Common Resources outcomes in the case of public goods or common resources?

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Introduction The Different Kinds of Goods • We consume many goods without paying: • Excludability – Parks, national defense, clean air & water – Property of a good whereby a person can be prevented from using it – When goods have no prices, the market – Excludable : MOS rice burgers, Wi-Fi access forces that normally allocate resources are Not excludable absent – : radio signals, national defense • Rivalry in consumption – The private market may fail to provide the socially efficient quantity of such goods – Property of a good whereby one person’s use diminishes other people’s use • ‘Governments can sometimes improve – Rival : MOS rice burgers market outcomes’ – Not rival : An MP3 file of David Tao’s latest single

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The Different Kinds of Goods Active Learning 1 Categorizing Roads

• Private goods • A road is which of the four kinds of goods? – Excludable & Rival in consumption (food) • Hint : The answer depends on whether the • Public goods road is congested or not, and whether it’s a – Not excludable & Not rival in consumption toll road or not. Consider the different (national defense) cases. • Common resources – Rival in consumption & Not excludable (fish in the ocean) • Club goods – Excludable & Not rival in consumption (cable TV)

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Active Learning 1 Answers ASK THE EXPERTS Congestion Pricing • Rival in consumption? Only if congested. “In general, using more congestion charges in • Excludable? Only if a toll road. crowded transportation networks — such as higher tolls during peak travel times in cities, and peak fees Four possibilities: for airplane takeoff and landing slots — and using • Uncongested non-toll road: public good the proceeds to lower other taxes would make citizens on average better off.” • Uncongested toll road: club good • Congested non-toll road: common resource • Congested toll road: private good

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The Different Kinds of Goods Public Goods • Public goods and common resources • Free rider – Externalities arise because something of – Person who receives the benefit of a good value has no price attached to it but avoids paying for it – Private decisions about consumption and • The free-rider problem production can lead to an inefficient – Public goods are not excludable, so outcome people have an incentive to be free riders – Public policy can potentially raise – Prevents the private market from economic well-being supplying the goods – Market failure

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Public Goods Public Goods • Government can remedy the free-rider • Cost–benefit analysis problem – Compare the costs and benefits to society – If total benefits of a public good exceeds of providing a public good its costs – Doesn’t have any price signals to observe – Provide the public good – Government findings: rough – Pay for it with tax revenue approximations at best – Make everyone better off – Cost-benefit analyses are imprecise, so – Problem: the efficient provision of public goods is Measuring the benefit is usually difficult more difficult than that of private goods

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Public Goods Public Goods • Some important public goods • Some important public goods – National defense – Antipoverty programs financed by taxes • Very expensive public good • Welfare system (Temporary Assistance for • US$748 billion in 2014 for USA Needy Families program, TANF) – Basic research – Provides a small income for some poor families • Food stamps (Supplemental Nutrition • General knowledge Assistance Program, SNAP) • Subsidized by government – Subsidize the purchase of food for those with low • The public sector fails to pay for the right incomes amount and the right kinds • Government housing programs – Make shelter more affordable

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Common Resources Common Resources • Common resources are not excludable • The tragedy of the commons – Cannot prevent free riders from using – Parable that shows why common – Little incentive for firms to provide resources are used more than desirable – Role for government: • Medieval town where sheep graze on Seeing that they are provided common land • As the population grows, the number of • Common resources: rival in consumption sheep grows – Each one’s use reduces others’ ability to use • The amount of land is fixed, the grass begins – Role for government: to disappear from overgrazing Ensuring they are not overused

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Common Resources Active Learning 2 Policy options for common resources • The tragedy of the commons • What could the townspeople (or their – Social and private incentives differ government) have done to prevent the • The private incentives (using the land for free) tragedy? outweigh the social incentives (using it carefully) • Try to think of two or three options. – Arises because of a negative externality • Allowing one’s flock to graze on the common land reduces its quality for other families – People neglect this external cost, resulting in overuse of the land

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Active Learning 2 Answers Policy Options to Prevent Overconsumption of Common Resources • Impose a corrective tax on the use of the • Regulate use of the resource land to “internalize the externality.” • Impose a corrective tax to internalize the • Regulate use of the land (the “command- externality and-control” approach). – Hunting & fishing licenses, entrance fees • Auction off permits allowing use of the land. for congested national parks • Divide the land, sell lots to individual families; each family will have incentive not to overgraze its own land.

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Policy Options to Prevent Common Resources Overconsumption of Common Resources • Auction off permits allowing use of the • Some important common resources resource – Clean air and water – Example: spectrum auctions by the • Negative externality: pollution US Federal Communications Commission, • Regulations or corrective taxes – 4G LTE Cell Phone License Auctions in – Congested roads Taiwan • Negative externality: congestion • If the resource is land, convert to a private • Corrective tax: charge drivers a tool good • Tax on gasoline – By dividing and selling parcels to individuals

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Common Resources • Some important common resources Solutions to Lack-of-Market Failure – Fish, whales, and other wildlife } In 2009, "Lin" Ostrom won the Sveriges • Oceans: the least regulated common Riksbank Prize in Economic Sciences in resource Memory of Alfred Nobel for: –Needs international cooperation } Studying how real people manage common resources both in the field (case study) and lab –Difficult to enforce an agreement (experiments) • Fishing and hunting licenses } In 2012, Al Roth won the same prize for: • Limits on fishing and hunting seasons } Designing markets for medical interns, school • Limits on size of fish choice and even organ transplants (kidney • Limits on quantity of animals killed exchange) © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 23 management system for classroom use. 2017/10/22 Public Goods/Nonexcludable Joseph Tao-yi Wang

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“You’ve Got Spam!” Importance of Property Rights • Some firms use spam e-mails to advertise their products. • Market fails to allocate resources efficiently – Spam is not excludable: firms cannot be prevented from spamming – Because property rights are not well established – Spam is rival: as more companies use spam, it becomes less effective. – Some item of value does not have an owner with the legal authority to control it • Thus, spam is a common resource. – Like most common resources, spam is overused – which is why we get so much of it!

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Importance of Property Rights Summary • The government can potentially solve the • Goods differ in whether they are excludable problem and whether they are rival in consumption. – Help define property rights and thereby – A good is excludable if it is possible to prevent someone from using it. unleash market forces – A good is rival in consumption if one person’s – Regulate private behavior use of the good reduces others’ ability to use – Use tax revenue to supply a good that the the same unit of the good. market fails to supply – Markets work best for private goods, which are both excludable and rival in consumption. – Markets do not work as well for other types of goods.

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Summary Summary • Public goods are neither rival in consumption nor • Common resources are rival in consumption excludable. but not excludable. – Examples of public goods include fireworks – Examples include common grazing land, clean displays, national defense, and the discovery of air, and congested roads. fundamental knowledge. – Because people are not charged for their use of – Because people are not charged for their use the public good, they have an incentive to free of common resources, they tend to use them ride, making private provision of the good excessively. untenable. – Therefore, governments use various – Therefore, governments provide public goods, methods, such as regulations and corrective basing their decision about the quantity of each taxes, to limit the use of common resources. good on cost–benefit analysis. © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use © 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 29 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 30 management system for classroom use. management system for classroom use.

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11: Public Goods & Common Resources 11: Public Goods & Common Resources } Excludable vs. Rivalness } Homework: } Mankiw, Ch.10, Problem 4, 5, 7, 9?, 10 } Public Goods } Non-excludable and non-rival goods } Challenge Questions (Past Midterms) } Common Resources } 2007 - Essay Q7 } Non-excludable and rival goods } 2009 - (Multi-Choice Q14) } Classical Market Failure = } 2012 - (True/False Q10) Lack of Market Failure! } Caused by lack of property rights !

2017/10/22 Public Goods/Nonexcludable Joseph Tao-yi Wang 2017/10/22 Public Goods/Nonexcludable Joseph Tao-yi Wang

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