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197
r 11
WHAT’S NEW IN THE SEVENTH EDITION:
There are no major changes to this chapter.
LEARNING OBJECTIVES:
the defining characteristics of public goods and common resources.
why private markets fail to provide public goods.
why the cost–benefit analysis of public goods is both necessary and difficult.
why people tend to use common resources too much.
CONTEXT AND PURPOSE:
Chapter 11 is the second chapter in a three-chapter sequence on the economics of the public sector.
KEY POINTS:
for other types of goods.
PUBLIC GOODS AND
COMMON RESOURCES
11
198 ❖ Chapter 11/Public Goods and Common Resources
Public goods are neither rival in consumption nor excludable. Examples of public goods include
fireworks displays, national defense, and the creation of fundamental knowledge. Because people are
not charged for their use of the public good, they have an incentive to free ride, making private
provision of the good untenable. Therefore, governments provide public goods, basing their decision
Common resources are rival in consumption but not excludable. Examples include common grazing
land, clean air, and congested roads. Because people are not charged for their use of common
resources, they tend to use them excessively. Therefore, governments use various methods to limit
the use of common resources.
CHAPTER OUTLINE:
I. The Different Kinds of Goods
prevented from using it.
2. Definition of rivalry in consumption: the property of a good whereby one person’s
use diminishes other people’s use.
B. Using these two characteristics, goods can be divided into four categories.
consumption.
consumption.
excludable.
4. Definition of club goods: goods that are excludable but not rival in consumption.
Rival in consumption?
Yes
No
Excludable?
Yes
Private Goods
ice-cream cones
clothing
congested toll roads
Club Goods
fire protection
cable TV
uncongested toll roads
No
Common Resources
fish in the ocean
the environment
congested nontoll roads
Public Goods
national defense
knowledge
uncongested nontoll roads
Figure 1
Chapter 11/Public Goods and Common Resources ❖ 199
D. Public goods and common resources each create externalities because they have value yet have
correct the externality.
II. Public Goods
B. The Free-Rider Problem
2. Thus, some individuals would get a benefit from the show without paying for it.
Activity 1—Private Goods/Public Goods: A Demonstration
Type: In-class demonstration
Topics: Public and private goods
Materials needed: A candy bar
Time: 10 minutes
Class limitations: Works in any size class
Purpose
This example illustrates the difference between public and private goods.
Instructions
Ask for a volunteer. Give the volunteer a candy bar and ask him or her to eat it.
While the student eats the candy bar, explain that you do not want the student’s enjoyment
of the candy to be marred by taking notes. Offer to draw some beautiful artwork on the board
to increase the volunteer’s enjoyment.
Draw a picture on the board. A large poster or a slide of real artwork could be substituted.
Ask the volunteer if he or she is enjoying the candy and the art. Ask the class if they get any
enjoyment from the candy. Ask the class if they get any enjoyment from the art.
Points for Discussion
The candy bar is a private good. It is rival in consumption and excludable. Only the volunteer
gets to enjoy the candy.
The “artwork” is neither rival in consumption nor excludable. The volunteer’s enjoyment did
not diminish the enjoyment of the rest of the class. The “artwork” is a public good.
Other examples of public goods that may be of interest to students include highway
snow removal, flood control, and mosquito control. In all of these instances, one can
argue that government intervention is necessary in order to achieve economic
efficiency.
200 ❖ Chapter 11/Public Goods and Common Resources
3. Definition of free rider: a person who receives the benefit of a good but avoids
paying for it.
4. More than likely, private individuals or firms will not produce the fireworks show because it
would not be profitable.
5. If the social value of the fireworks show is greater than the cost of producing it, it would be
a. The local government can sponsor the show and charge each of its citizens with part of
b. If the tax is less than the value of the fireworks display to each individual, everyone is
better off.
6. This is another demonstration of Principle #7: Governments can sometimes improve market
outcomes.
B. Some Important Public Goods
1. National defense
2. Basic research
3. Fighting poverty
C.
Case Study: Are Lighthouses Public Goods?
2. Use of a lighthouse is both nonexcludable and nonrival in consumption.
4. In 19th-century England, lighthouses were operated more like private goods. The owners of
local ports were charged with the service and if they did not pay, the owner of the lighthouse
simply turned off the light and ships avoided stopping in that port.
1. To decide whether or not it should fund a public good, the government must conduct a study
Students often incorrectly believe that all goods and services provided by the government are
public goods. An example of this is education. This would be a good example to use to
explain the meaning of excludability and rivalry in consumption.
Point out the differences in the way in which a business provides and finances its
products and the way in which governments do the same. This will help students see
the difference between the market process and the political process as alternative
ways of providing goods and services.
Chapter 11/Public Goods and Common Resources ❖ 201
2. Definition of cost-benefit analysis: a study that compares the costs and benefits to
society of providing a public good.
is problematic.
a. Quantifying benefits is difficult using the results from a questionnaire.
b. Respondents have little incentive to tell the truth.
the sellers.
5.
Case Study: How Much Is a Life Worth?
a. Example: the decision to place a stoplight at a busy intersection to reduce the risk of
fatal accidents.
b. The cost is known in dollar terms. But how can we put the value of a life in dollar terms?
c. Some studies examine the value of the lifetime earnings the individual could have made,
but this implies that the life of someone who is disabled or retired has no monetary
value.
d. Economists instead may look at the risks that individuals voluntarily take and those that
they require compensation for. Workers in risky occupations are paid a wage premium to
take these risks. This approach gives us an idea of the value that an individual places on
his or her life. Studies have shown this value to be approximately $10 million.
III. Common Resources
B. The Tragedy of the Commons
1. Definition of the Tragedy of the Commons: a parable that illustrates why common
resources get used more than is desirable from the standpoint of society as a
whole.
a. Over time, as the population grows, so does the number of sheep.
b. Given the fixed amount of land, the grass will begin to disappear because it is being
overgrazed.
Before talking about this section, ask students to write down the value of their lives.
Ask them how they arrived at this answer. This is a nice way to lead into the
difficulty of cost–benefit analysis.
202 ❖ Chapter 11/Public Goods and Common Resources
c. The townspeople will no longer be able to raise sheep because the private incentives
(using the land for free) outweigh the social incentives (using the land carefully).
C. Some Important Common Resources
1. Clean air and water
2. Congested roads
drivers should pay more for using roads.
3. Fish, Whales, and Other Wildlife
because no one owns them. This means that no one has an incentive to make sure that
a sufficient number are preserved. This is different from a cow, which is usually owned
by a rancher. The rancher has an incentive to ensure that the cattle population on his
ranch is maintained so that he can continue to earn a profit. Thus, governments could
elephants on their land.
A more modern example is the overfishing of oceans, bays, and rivers, leading to
dangerously low seafood populations in some areas. Other examples include
excessive extraction of oil from a large pool beneath several different property
owners’ land, and congested highways.
