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PowerPoint Slides prepared by:Andreea CHIRITESCUEastern Illinois University11Public Goods and Common Resources 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.1The Different Kinds of GoodsExcludabilityProperty of a good whereby a person can be prevented from using itRivalry in consumptionProperty of a good whereby one persons use diminishes other peoples use 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.2The Different Kinds of GoodsPrivate goodsExcludable&Rival in consumptionPublic goodsNot excludable&Not rival in consumptionCommon resourcesRival in consumption&Not excludableClub goodsExcludable&Not rival in consumptionOne type of natural monopoly 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.3Figure 1 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.Four Types of GoodsGoods can be grouped into four categories according to two characteristics:(1)A good is excludable if people can be prevented from using it.(2)A good is rival in consumption if one persons use of the good diminishes other peoples use of it.This diagram gives examples of goods in each category.4The Different Kinds of GoodsPublic goods and common resourcesNot excludablePeople cannot be prevented from using themAvailable to everyone free of chargeNo price attached to itExternal effectsPositive externalities(public goods)Negative externalities(common resources)2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.5The Different Kinds of GoodsPublic goods and common resourcesPrivate decisions about consumption and production Can lead to an inefficient allocation of resourcesGovernment interventionCan potentially raise economic well-being 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.6Public GoodsFree riderPerson who receives the benefit of a good but avoids paying for itThe free-rider problemPublic goods are not excludablePrevents the private market from supplying the goods 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.7Public GoodsGovernment can remedy the free-rider problem 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.8“I like the concept if we can do it with no new taxes.”-If total benefits of a public good exceeds its costs-Provide the public good-Pay for it with tax revenue-Make everyone better offPublic GoodsSome important public goodsNational defenseVery expensive public good$717 billion in 2011Basic researchGeneral knowledgeSubsidized by governmentThe public sector fails to pay for the right amount and the right kinds 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.9Public GoodsSome important public goodsAntipoverty programs(financed by taxes)Welfare system(Temporary Assistance for Needy Families program,TANF)Provides a small income for some poor familiesFood stamps(Supplemental Nutrition Assistance Program,SNAP)Subsidize the purchase of food for those with low incomesGovernment housing programsMake shelter more affordable 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.10Are lighthouses public goods?LighthousesMark specific locations so that passing ships can avoid treacherous watersBenefit:to the ship captainNot excludable,not rival in consumptionIncentive:free ride without payingMost are operated by the government 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.11What kind of good is this?Are lighthouses public goods?In some casesLighthouses are closer to private goodsCoast of England,19th centuryLighthouses were privately owned and operatedThe owner of the lighthouse charged the owner of the nearby portIf the port owned did not pay,lighthouse owner turned the light offShips avoided that port 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.12Are lighthouses public goods?Decide whether something is a public goodDetermine who the beneficiaries areDetermine whether the beneficiaries can be excluded from using the goodA free-rider problemWhen the number of beneficiaries is largeExclusion of any one of them is impossible 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.13Public GoodsThe difficult job of costbenefit analysisGovernmentDecide what public goods to provideIn what quantitiesCostbenefit analysisCompare the costs and benefits to society of providing a public goodDoesnt have any price signals to observeGovernment findings Rough approximations at best 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.14How much is a life worth?Cost:$10,000 for a new traffic lightBenefit:increased safetyRisk of a fatal traffic accidentDrops from 1.6%to 1.1%ObstacleMeasure costs and benefits in the same unitsPut a dollar value on a human life?Priceless=infinite dollar value 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.15How much is a life worth?Implicit dollar value of a human lifeCourts:award damages in wrongful-death suits Total amount of money a person would have earned if he or she had livedIgnores other opportunity costs of losing ones lifeRisks that people are voluntarily willing to take and how much they must be paid for taking them Value of human life=$10 million 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.16How much is a life worth?Cost-benefit analysisTraffic lightReduces risk of fatality by 0.5 percentage pointsExpected benefit=0.005$10 million=$50,000Cost($10,000)Benefit($50,000)Approve the traffic light 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.17Common ResourcesCommon resourcesNot excludableRival in consumptionThe tragedy of the commonsParable that shows why common resources are used more than desirableFrom societys standpointSocial and private incentives differArises because of a negative externality 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.18Common ResourcesThe tragedy of the commonsNegative externalityOne person uses a common resourceDiminishes other peoples enjoyment of itCommon resources tend to be used excessivelyGovernment can solve the problemRegulation or taxes to reduce consumption of the common resourceTurn the common resource into a private good 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.19Common ResourcesSome important common resourcesClean air and waterNegative externality:pollutionRegulations or corrective taxesCongested roadsNegative externality:congestionCorrective tax:charge drivers a toolTax on gasoline 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.20Common ResourcesSome important common resourcesFish,whales,and other wildlifeOceans are the least regulated common resourceNeeds international cooperationDifficult to enforce an agreementFishing and hunting licensesLimits on fishing and hunting seasonsLimits on size of fishLimits on quantity of animals killed 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.21Why the cow is not extinctAnimals with commercial value that are threatened with extinctionBuffalo North AmericaHunting in 19th centuryElephantsAfrican countriesHunting today 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.22Will the market protect me?Why the cow is not extinctThe cowCommercial valueSpecies continues to thriveCows are a private goodRanches are privately ownedRancher-great effort to maintain the cattle population on his ranchReaps the benefit 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.23Why the cow is not extinctElephant-common resourcePoachers are numerousStrong incentive to kill elephantsGovernment of Kenya,Tanzania,and UgandaIllegal to kill elephants and sell ivoryHard to enforce lawsDecreasing population of elephants 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.24Why the cow is not extinctGovernment of Botswana,Malawi,Namibia,and ZimbabweMade elephants a private goodPeople can kill elephants on their own propertyLandowners have an incentive to preserve the speciesElephant populations have started to rise 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.25Importance of Property RightsMarket fails to allocate resources efficientlyBecause property rights are not well establishedSome item of value does not have an owner with the legal authority to control it 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.26Importance of Property RightsThe government can potentially solve the problemHelp define property rights and thereby unleash market forcesRegulate private behaviorUse tax revenue to supply a good that the market fails to supply 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,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 for classroom use.27
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