Chapter 11 Homework The Landowners Would Then Have Some Incentive

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r 11

WHAT’S NEW IN THE SIXTH EDITION:

The discussion of common resources now refers to new term “club goods” instead of “national

monopolies.” A new

In the News

feature on “The Case for Toll Roads” has been added.

LEARNING OBJECTIVES:

By the end of this chapter, students should understand:

➢ the defining characteristics of public goods and common resources.

CONTEXT AND PURPOSE:

Chapter 11 is the second chapter in a three-chapter sequence on the economics of the public sector.

Chapter 10 addressed externalities. Chapter 11 addresses public goods and common resources—goods

for which it is difficult to charge prices to users. Chapter 12 will address the tax system.

KEY POINTS:

• Goods differ in whether they are excludable and whether they are rival in consumption. A good is

excludable if it is possible to prevent someone from using it. A good is rival in consumption if one

person’s use of the good reduces another’s ability to use the same unit of the good. Markets work

PUBLIC GOODS AND

COMMON RESOURCES

11

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best for private goods, which are both excludable and rival in consumption. Markets do not work as

well for other types of goods.

CHAPTER OUTLINE:

I. The Different Kinds of Goods

A. When classifying types of goods in the economy, two characteristics should be examined.

1. Definition of excludability: the property of a good whereby a person can be

B. Using these two characteristics, goods can be divided into four categories.

1. Definition of private goods: goods that are both excludable and rival in

consumption.

C. The boundary between the categories is sometimes fuzzy. Whether goods are excludable or rival

in consumption is often a matter of degree.

Rival in consumption?

Yes

No

Yes

Private Goods

▪ ice-cream cones

▪ clothing

Club Goods

▪ fire protection

▪ cable TV

Chapter 11/Public Goods and Common Resources ❖ 199

D. Public goods and common resources each create externalities because they have value yet have

no price because they are not sold in the marketplace. These external effects imply that market

outcomes will be inefficient in the absence of government involvement or private resolutions to

correct the externality.

II. Public Goods

A. Example: a fireworks display. It is not excludable because it would be nearly impossible to keep

others from viewing it and it is not rival in consumption because one person’s enjoyment does

not preclude others from enjoying the fireworks.

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.

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.

Other examples of public goods that may be of interest to students include highway

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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

efficient for the fireworks show to be produced.

6. This is another demonstration of Principle #7: Governments can sometimes improve market

outcomes.

C. Some Important Public Goods

1. National defense

D.

Case Study: Are Lighthouses Public Goods?

1. Lighthouses are used so that ships can mark specific locations and avoid treacherous waters.

E. The Difficult Job of Cost–Benefit Analysis

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 Office, “Goodbye Toby.”

(Season 4, 14:30-15:10; 35:14-38:47). Dunder Mifflin

Scranton is planning a going-away party for Toby. Jim contributes money to buy fireworks for

Chapter 11/Public Goods and Common Resources ❖ 201

1. To decide whether or not it should fund a public good, the government must conduct a study

of the total benefits and costs of the good.

b. Respondents have little incentive to tell the truth.

4. This difficulty implies that the efficient supply of public goods is much more challenging than

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?

III. Common Resources

A. Common resources are not excludable, but they are rival in consumption. This implies that

policymakers need to be concerned about how much is used.

B. The Tragedy of the Commons

1. Definition of the Tragedy of the Commons: a parable that illustrates why common

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.

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b. Given the fixed amount of land, the grass will begin to disappear because it is being

overgrazed.

C. Some Important Common Resources

1. Clean air and water

2. Congested roads

3. Fish, Whales, and Other Wildlife

a.

Case Study: Why the Cow is Not Extinct

— Elephants in Africa are common resources

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

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.

Seinfeld, “The Parking Space.”

(Season 3, 5:53-8:15; 12:00-12:20; 15:16–

15:28; 16:17-17:33; 20:55-21:35). George won’t pay for a parking spot in a

garage because he would rather find a public spot (nonexcludable) for free. George

Chapter 11/Public Goods and Common Resources ❖ 203

IV. Conclusion: The Importance of Property Rights

A. With both public goods and common resources, the market outcome will be inefficient because of

the lack of well-defined property rights.

SOLUTIONS TO TEXT PROBLEMS:

Quick Quizzes

1. Public goods are goods that are neither excludable nor rival in consumption. Examples

2. The free-rider problem occurs when people receive the benefits of a good but avoid paying

for it. The free-rider problem induces the government to provide public goods because the

Activity 2—Article on the Role of Government

Type: Take-home assignment

Topics: The role of government, market failure

Class limitations: Works in any size class

Purpose

This assignment gives students an opportunity to identify real-world market failures and

consider how the government can address these issues. Categorizing a real problem will help

students clearly distinguish the various types of market failure.

Ask the students to do the following:

1. Find an article in a recent newspaper or magazine that illustrates market failure.

2. Identify the type of market failure. Is it a problem of negative externalities, positive

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3. Governments try to limit the use of common resources because one person’s use of the

Questions for Review

1. An excludable good is one that people can be prevented from using. A good that is rival in

consumption is one for which one person’s use of it diminishes another person’s enjoyment

2. A public good is a good that is neither excludable nor rival in consumption. An example is

national defense, which protects the entire nation. No one can be prevented from enjoying

3. Cost–benefit analysis is a study that compares the costs and benefits to society of providing

a public good. It is important because the government needs to know which public goods

4. A common resource is a good that is rival in consumption but not excludable. An example is

fish in the ocean. If someone catches a fish, that leaves fewer fish for everyone else, so it is

Problems and Applications

1. a. (1) Police protection is a club good because it is excludable (the police may ignore some

neighborhoods) and not rival in consumption. You could make an argument that police

(2) Snow plowing is most likely a common resource. Once a street is plowed, it is not

(3) Education is a private good (with a positive externality). It is excludable, because

someone who does not pay can be prevented from taking classes. It is rival in

Chapter 11/Public Goods and Common Resources ❖ 205

(5) City streets are common resources when congested. They are not excludable,

because anyone can drive on them. But they are rival in consumption, because

2. a. The externalities associated with public goods are positive. Because the benefits from the

public good received by one person do not reduce the benefits received by anyone else,

the social value of public goods is substantially greater than the private value. Examples

3. a. Charlie is a free rider.

b. The government could solve the problem by sponsoring the show and paying for it with

4. a. If only a few people use the free wireless internet, it would not be excludable and not

rival in consumption. Thus, it would be a public good.

5. a. Within the dorm room, the showing of a movie is a public good. None of the roommates

can be excluded from viewing the movie. Because one roommate’s viewing does not

affect the ability of another roommate to view the movie, the good is also nonrival in

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c. The total cost would be $8  3 = $24. If the cost were divided evenly among the

roommates, each would pay $6. Judd values three movies at $18 so his surplus would be

$12. Joel values three movies at $12 so his surplus would be $6. Gus values three

movies at $6, so his surplus would be $0. Tim values three movies at $3 so his surplus is

-$3. Total surplus among the three roommates would be $15.

d. The costs could be divided up by the roommates based on the benefits they receive.

Because Judd values the movies the most, he would pay the greatest share. The problem

6. a. Because knowledge is a public good, the benefits of basic scientific research are available

to many people. The private firm doesn’t take this into account when choosing how

much research to undertake; it only takes into account what it will earn.

7. When a person litters along a highway, others bear the negative externality, so the private

costs are low. Littering in your own yard (or perhaps your neighbors’ yards) imposes costs on

you, so it has a higher private cost and is thus rare.

8. a. The productivity of each fisherman declines as

N

rises because the fish in the town lake

are a common resource. It is not excludable but rival in consumption. The fish on the

farm is a private good because it is excludable and rival in consumption.

Chapter 11/Public Goods and Common Resources ❖ 207

The greatest number of fish is produced when two fishermen fish at the lake while the

other three fish at the farm. A total of 14 fish would be caught.

9. When the system is congested, each additional rider imposes costs on other riders. For

10. The information is nonexcludable, because it is provided to the public free of charge. In

addition, the receipt of the information by one individual does not preclude the receipt of the

information by another. Thus, the good is nonrival in consumption. Because the good is both

nonexcludable and nonrival in consumption, it is a public good.

11. Recognizing that there are opportunity costs that are relevant for cost–benefit analysis is the