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? Premium PowerPoint Slides by: V. Andreea CHIRITESCU Modified by Joseph Tao-yi Wang Eastern Illinois University © 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 2 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 1 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. management system for classroom use. 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 © 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 3 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 4 management system for classroom use. management system for classroom use. 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) © 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 5 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 6 management system for classroom use. management system for classroom use. 1 10/22/2017 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 © 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 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 7 permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 8 management system for classroom use. management system for classroom use. 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 © 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 9 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 10 management system for classroom use. management system for classroom use. 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 © 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 11 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 12 management system for classroom use. management system for classroom use. 2 10/22/2017 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 © 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 13 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 14 management system for classroom use. management system for classroom use. 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 © 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 15 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 16 management system for classroom use. management system for classroom use.