Public goods and openaccess common property

1
Public goods and open-access common property
2
Outline

• Classification of goods private and public
• What public goods are, and why markets fail to
  supply them
• What common goods are, and why they are overused
• What public goods with exclusion (artificially
  scarce goods) are, and why they are
  under-consumed
• How government intervention

3
Characteristics of Goods

• Goods can be classified according to two
  attributes
• whether they are excludable and
• whether they are rival in consumption
• A good is excludable if the supplier of that good
  can prevent people who do not pay from consuming
  it.
• A good is rival in consumption if the same unit
  of the good cannot be consumed by more than one
  person at the same time.

4
Properties of Private goods
Rivalry If one individual use a good no other
can consume that specific good at the same time
(only one individual can write with a pen, only
one individual can eat a grape). Exclusion
Other individuals can be prevented from consuming
the good. However, there are goods characterized
by non-rivalry, non-excludability or both of
these characteristics.
5
Properties of Public Goods

• Pure public goods share two characteristics
• Nonrival Cost of another person consuming the
  good is zero
• Nonexcludable Very expensive to prevent others
  from consuming the good
• Impure Public Goods

6
Public Goods versus Private Goods

• Once a pure public good is supplied to one
  individual, it is simultaneously supplied to all.
• A private good is only supplied to the individual
  who bought it.

7
Government Provision of Public Goods

• Pure public goods are provided by government
  because
• For-profit private firms would find it difficult
  to recover their costs of production.
• Since the MC of serving additional users is zero
  once the good has been produced, then charging
  for the good would be inefficient.

8
More examples

• Private goods
• Ice Cream
• Apple
• Coke
• Pen

• Public Goods
• National defense
• Clean Air
• Radio/TV station
• Cable TV
• Lighthouse
• Fireworks display
• Uncongested freeway
• Free Parks

9
Four types of goods

• Private goods, which are excludable and rival in
  consumption, like wheat
• Public goods, which are nonexcludable and
  nonrival in consumption, like a public sewer
  system
• Common resources, which are nonexcludable but
  rival in consumption, like clean water in a river
• Public goods with exclusion (artificially scarce
  goods), which are excludable but nonrival in
  consumption, like pay-per-view movies on cable TV

10

• Goods and Services

Exclusion
No exclusion
Rivalry
No rivalry
11
1) Private Goods
A private good and service that is both rival
and excludable. It can be consumed by only one
person at a time and only by the person who has
bought it or owns it. A can of Coke is a private
goods. Only one person enjoys the benefits of a
single can of Coke, and everyone, except the
person who bought the can, is excluded from
consuming it.
12
2) Open-access common property and the tragic of
the commons

• It is more or less impossible to exclude people
  from using some resources (roads, parks,
  biodiversity, fishing waters). We call such goods
  open-access common property. (rivalry but
  non-excludable)
• Individuals do not consider the total social cost
  of their consumption.
• Externality of consumption in the form of overuse
  (e.g.congestion and extinction of species).
• Open-access is the problem underlying
• the tragic of the commons.

13
Examples open-access common property

• Common pools specific resources is shared by
  more than one agent, e.g. water, oil and gas.
  Competition empties the common pool faster than
  what is optimal.
• Fisheries No one owns a fish until its caught.
  Overuse in this situation means that the harvest
  rate of fish exceeds their growth rate (new born
  fishes is fewer than the number of caught fishes)
  gtFisheries creates a externality in terms of a
  smaller fish population in the future. Extinction
  of fish population.
• Forests One problem in many developing
  countries is deforestation. Trees are cut to
  create agricultural land or to be used for
  heating. Trees prevent flooding and soil-erosion,
  i.e. over-harvesting is no good idea.
• Internet if too many people try to enter a
  public webpage at the same time the system gets
  slow.
• Roads To many cars on the same road leads to
  congestion.

14
Problem of overuse

• Common resources left to the free market suffer
  from overuse a user depletes the amount of the
  common resource available to others but does not
  take this cost into account when deciding how
  much to use the common resource.
• In the case of a common resource, the marginal
  social cost of my use of that resource is higher
  than my individual marginal cost, the cost to me
  of using an additional unit of the good.
• The next slide illustrates this point

15
What can be done to prevent overuse of open
access common properties?
MC,P
Suppose the MC of consumption is close to zero.
The marked area under the MCS-curve is an
efficiency loss because MWTPltMCS. Open access
leads to overuse (congestion, extinction,
clear-cut).
D
MCS
Extinction, Clear-cut
PS
Q
QS
MC
The government can solve the problem in at leased
two ways Regulate the use of the commons by a
quota equal to QS or a fee equal to PS.
(fish-quota, fish-permit) Assign private property
rights, i.e. covert common property into private
property. (private fish farms)