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Module 36 krugman 1
Module 36
Public Goods and Common Resources
What’s New in the Fourth Edition?
• Updated business cases
Module Objectives
• What is a public good and how is it different from a private good?
• What is a common resource and why is it overused?
• What is an artificially scarce good and why is it underconsumed?
Teaching Tips
Private Goods—and Others
Creating Student Interest
• Conduct the following demonstration and then use it to prompt a discussion of private goods, public
goods, and free-riding. Bring a small token to class for each student—for example, pieces of candy.
(Don’t show them what you have, so that preferences for individual candies don’t influence student
choices.) Tell the students that you have brought them some treats today. If they declare that they
would like one of the treats, they will get one. However, you have also brought a treat for the whole
class—bonus points! If 75% or more of the class decides they would not like a treat, then the whole
class will get bonus points. Emphasize that everyone in the class will get the bonus points or no one
will. It doesn’t matter what an individual chooses—either everyone in the class or no one in the class
gets bonus points. Also, the treats go to those who have said they would like one, regardless of
whether the class gets bonus points. You should select the treat, the percent of the class, and the
number of bonus points to fit your particular class. You can also change the variables and rerun the
demonstration for further illustration.
In the post-demonstration discussion, be sure to bring out that the treat represents a private good
(rival and excludable), that you have made the bonus points excludable, and that anyone who
decided they would like a treat and received bonus points (or prevented the class from getting
them) was a “free rider.” That is, those who got treats did not “pay” their treat to get the potential
bonus points for everyone.
Presenting the Material
• Students may be unclear about the meaning of the term rival in consumption. Give a specific example
of a student eating an apple. No one else can eat the apple at the same time.
Module 36 krugman 2
everyone whose children watch Sesame Street contributes to public television; most families free-
ride on the generosity of others.
Public Goods
Creating Student Interest
• Ask students if education is a public good. Is it nonrival? Is it nonexcludable? Is education provided
by the market or by the government? Education provides an interesting discussion because the
answer to each of the questions is “somewhat” or “it depends.” You can add additional students to a
class, up to a point—but then consumption becomes rival. Universal education in the United States
means that education is, in a way, nonexclusive. However, private schools can prevent consumption
by those who do not pay. Even private schools receive public funding and public schools receive
private contributions. This discussion can illustrate the concepts important to determining what
constitutes a public good as well as showing that it isn’t always clear.
• Tell students that the university is planning to plant more trees on campus. They are going to collect
contributions from students and then decide how many trees to plant based on how much they collect.
Ask each student to take out a piece of paper, or alternatively pass out small pieces of paper to each
student, and have them record how much they are willing to donate. Tell them to pretend they will
really have to pay so they should only write down a number that represents a true willingness to pay.
Collect the papers and tally up the results. You are sure to get some zero votes. Ask students if they
think this is fair that some people pay and some do not. Ask them if it would be better to have the
university charge each student a flat fee as part of tuition to pay for the trees. This example highlights
the free-rider problem.
• Use Handout 36-1 to help students understand the optimal amount of a public good.
• Use Handout 36-2 to help students discern if a good is a public good.
Common Resources
Creating Student Interest
• Present the example of a highway as a common resource. Is it excludable? Is it rival? Ask the
students to consider toll roads versus federal highways—are toll roads rival and excludable? What
happens when highways become crowded? Is an overcrowded highway “free”? (There is an
opportunity cost to traffic jams.) How would overcrowding be addressed for a toll road? (Raise the
toll.) What about for a federal highway? (Build more?)
Presenting the Material
• Explain that in an unregulated market, the actual use will exceed the efficient use of the resource.
• Organize students into teams or just pair students. Tell them they are in charge of preserving forests
in the United States. Ask them to come up with three strategies to help preserve this common
Artificially Scarce Goods
Module 36 krugman 3
Creating Student Interest
• Tell your students that you are considering going out of town for a week later in the semester. You
plan to tape your class presentations in advance and make them available for students to download
• Ask the students to list the costs of creating downloadable videos of your class presentations (your
time, use of equipment, space on the Internet). After the downloadable video presentations have
been created, what is the marginal cost to you of an additional student watching the video? (Zero.)
• Based on this information, what price should you charge for access to the video? The allocatively
efficient price for the video is P = MC. Since MC = 0, it should be free! Any price above zero would
create deadweight loss as fewer students watch the video when the price increases. Should students
Presenting the Material
• Students may not understand why particular goods are “scarce.” Explain that because the good is
excludable, producers will charge a positive price for it and allow only those who paid for it to
consume it.
• Students may be unclear as to the meaning of “artificially” scarce. Explain that the marginal cost to
society of allowing one more sports fan to watch a game is zero. The game is being produced
anyway, so no additional scarce resources will be used up if everyone watches the game. Producers
make the game scarce because they can force viewers to pay for it.
• Use on-demand TV as an example of an artificially scarce good. Explain that the marginal cost of
allowing one more viewer to watch a show on TV is zero. An efficient price is equal to zero, so you
would think that anyone could watch it. However, because TV networks can exclude nonpayers from
watching, the good becomes artificially scarce.
Module Outline
I. Private Goods—and Others
A. Characteristics of goods
1. A good that is both excludable and rival in consumption is a private good.
2. Private goods can be efficiently provided by a market economy.
3. When a good is nonexcludable, the supplier cannot prevent consumption by people who
do not pay for it.
4. A good is nonrival in consumption if more than one person can consume the same unit
of the good at the same time.
Module 36 krugman 4
5. Fire protection is nonexcludable: Everyone is protected when fires are put out before
they spread. TV programs are nonrival in consumption: My decision to watch a show
does not prevent you from watching the same show.
6. We can classify four types of goods, as illustrated in text Figure 36-1, shown next.
B. Why markets can supply only private goods efficiently
1. Markets cannot supply goods and services efficiently unless they are private goods—
excludable and rival in consumption.
2. Goods that are nonexcludable suffer from the free-rider problem: Individuals have no
incentive to pay for their own consumption and instead will take a “free ride” on anyone
who does pay.
3. Because of the free-rider problem, even though consumers would benefit from increased
production of the nonexcludable good, no one individual is willing to pay more for it,
so no producer is willing to supply it. Therefore, nonexcludable goods suffer from
inefficiently low production in a market economy.
4. Goods that are nonrival in consumption suffer from inefficiently low consumption in a
market economy.
5. Private goods are the only goods that can be efficiently produced and consumed in a
competitive market because:
a. Producers have an incentive to produce private goods because they are excludable—
producers can charge for them.
b. Consumers have an incentive to pay a positive price—a price equal to the marginal
cost of production—when a good is rival in consumption.
6. Although most goods are private goods and therefore provided efficiently in a market
system, some crucial goods are nonexcludable and nonrival in consumption, so
government must step in to provide them.
II. Public Goods
A. Providing public goods
1. A public good is both nonexcludable and nonrival in consumption.
Module 36 krugman 5
2. Some examples of public goods are a sewage system, disease prevention, national
defense, and scientific research.
3. Sometimes a nongovernmental solution is found for the free-rider problem—for
example, voluntary contributions for scientific research.
4. When nongovernmental solutions fail or come up short, government must provide
public goods.
B. How much of a public good should be provided?
1. Sometimes, provision of a public good is an either-or decision. An example is a sewage
system.
2. In most cases, government must decide whether to provide a public good and how much
to provide.
3. In the special case of a public good, the marginal social benefit of a unit of the good is
equal to the sum of the individual marginal benefits that are enjoyed by all consumers
of that unit.
4. Because the marginal social benefit of one more unit of a public good is always greater
than the individual marginal benefit to any one individual, no individual is willing to
pay for the efficient quantity of the good. This is illustrated in text Figure 36-2, shown
next.
5. The problem of providing public goods is similar to the problem of dealing with positive
externalities: Market failure calls for government intervention.
C. Cost-benefit analysis
1. Governments engage in cost-benefit analysis when they estimate the social costs and
social benefits of providing a public good.
Module 36 krugman 6
2. Estimating the cost of supplying a public good is straightforward. Estimating the
benefits is a very difficult problem.
3. People have an incentive to overstate their desire for a public good.
III. Common Resources
A. The problem of overuse
1. A common resource is nonexcludable and rival in consumption.
2. Common resources left to the market suffer from overuse.
3. For a common resource, the marginal social cost of my use of that resource is higher
than my individual marginal cost.
4. Many negative externalities (such as pollution) can be thought of as involving common
resources (such as clean air).
B. The efficient use and maintenance of a common resource
1. Because common resources pose problems similar to those created by negative
externalities, the solutions are also similar. Society must get individual users of the
resource to consider the costs they impose on other users.
2. There are three ways to induce people who use common resources to internalize the
costs they impose on others.
IV. Artificially Scarce Goods
A. An artificially scarce good is excludable but nonrival in consumption.
B. Because the marginal cost of an individual’s consumption of an artificially scarce good is zero,
price always exceeds marginal cost, so consumption is inefficiently low.
Case Studies in the Text
Economics in Action
21st Century Piracy—This EIA discusses the piracy of intellectual property.
Ask students the following questions:
1. Why are intellectual property goods easily pirated? (Because once a good is created, the
Module 36 krugman 7
Handout 36-1
Date_________ Name____________________________ Class________ Professor________________
Willingness to Pay for a Public Good
The following table shows the marginal benefit that accrues to each of the three people in a society for
the consumption of a public good.
Quantity
MB1
MB2
MB3
MBT
MC
10
$90
$45
$35
$170
$110
20
80
40
30
150
110
1. If the marginal benefit for society for a public good is the sum of the individual marginal benefits,
complete the MBT column in the table above.
2. What is the optimal quantity of the public good that should be produced?
Module 36 krugman 8
Answers
Quantity
MB1
MB2
MB3
MBT
MC
10
$90
$45
$35
$170
$110
20
80
40
30
150
110
30
70
35
25
130
110
40
60
30
20
110
110
50
50
25
15
90
110
1. If the marginal benefit for society for a public good is the sum of the individual marginal benefits,
complete the MBT column in the table above.
See table above.
2. What is the optimal quantity of the public good that should be produced?
Module 36 krugman 9
Handout 36-2
Date_________ Name____________________________ Class________ Professor________________
Are These Public Goods?
Are the following public goods? Why or why not? If so, how could the problem be fixed?
• Highways
• National defense
• Voting
Module 36 krugman 10
Answers
