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r 11
WHAT’S NEW IN THE EIGHTH EDITION:
There is a new
Ask the Experts
feature on “Congestion Pricing” and a new question in the Problems and
Applications section.
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
➢ the defining characteristics of public goods and common resources.
➢ why private markets fail to provide public goods.
➢ some of the important public goods in our economy.
➢ why the cost–benefit analysis of public goods is both necessary and difficult.
➢ why people tend to use common resources too much.
➢ some of the important common resources in our economy.
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 other’s ability to use the same unit of the good. Markets work best
for private goods, which are both excludable and rival in consumption. Markets do not work as well
for other types of goods.
PUBLIC GOODS AND
COMMON RESOURCES
11
Chapter 11/Public Goods and Common Resources ❖ 185
• Public goods are neither rival in consumption nor excludable. Examples of public goods include
fireworks displays, national defense, and the discovery 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
about the quantity of each good on cost–benefit analysis.
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
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.
1. Definition of private goods: goods that are both excludable and rival in
consumption.
Rival in consumption?
Yes
No
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
C. The boundary between the categories is sometimes fuzzy. Whether goods are excludable or rival
in consumption is often a matter of degree.
Figure 1
186 ❖ Chapter 11/Public Goods and Common Resources
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.
B. The Free-Rider Problem
1. It would be difficult to sell tickets to the fireworks show because it is not excludable.
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.
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.
Chapter 11/Public Goods and Common Resources ❖ 187
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.
B. Some Important Public Goods
1. National defense
C.
Case Study: Are Lighthouses Public Goods?
1. Lighthouses are used so that ships can mark specific locations and avoid treacherous waters.
2. Use of a lighthouse is not excludable, nor rival in consumption.
3. Thus, most lighthouses are provided by the government.
D. The Difficult Job of Cost–Benefit Analysis
1. To decide whether it should fund a public good, the government must conduct a study of the
total benefits and costs of the good.
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.
188 ❖ Chapter 11/Public Goods and Common Resources
3. This is very difficult to do, because measuring how much individuals will value a specific good
is problematic.
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.
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
resources get used more than is desirable from the standpoint of society as a
whole.
2. Example: small, medieval town where sheep graze on common land.
a. Over time, as the population grows, so does the number of sheep.
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.
Chapter 11/Public Goods and Common Resources ❖ 189
C. Some Important Common Resources
1. Clean air and water
2. Congested roads
a.
Ask the Experts:
Congestion Pricing – 98 percent of economic experts agreed that using
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.
190 ❖ Chapter 11/Public Goods and Common Resources
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.
Instructions
This assignment is difficult for many students, particularly if they are unclear on the concept
of market failure. Not every example of government action will be appropriate for this
assignment. Students may find it easier to make a list of possible areas of market failures
before looking for an article.
Ask the students to do the following:
1. Find an article in a recent newspaper or magazine that illustrates market failure.
3. Governments try to limit the use of common resources because one person’s use of the
Chapter Quick Quiz
1. a
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 diminishes other people’s use of the same
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
192 ❖ Chapter 11/Public Goods and Common Resources
(3) Education is a private good (with a positive externality). It is excludable, because
(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. Fredo 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
5. a. Within the dorm room, the showing of a movie is a public good. None of the roommates
Chapter 11/Public Goods and Common Resources ❖ 193
affect the ability of another roommate to view the movie, the good is also not rival in
consumption.
d. The costs could be divided up by the roommates based on the benefits they receive.
6. a. Because knowledge is a public good, the benefits of basic scientific research are available
b. The United States has tried to give private firms incentives to provide basic research by
c. If it is basic research that adds to knowledge, it is not excludable at all, unless people in
$120. Nancy would vote against because her value ($20) is less than the cost. Bess
194 ❖ Chapter 11/Public Goods and Common Resources
would vote for because her value ($140) is greater than the cost. Ned would vote in
8. 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
9. When the system is congested, each additional rider imposes costs on other riders. For
10. Recognizing that there are opportunity costs that are relevant for cost–benefit analysis is the