Download Lecture 16 Outline Four Types of Goods Types of Goods Public Goods

A market failure
Lecture 16 Outline
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TYPES OF GOODS:
Public goods
Common resources
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Four Types of Goods
The Different Kinds of Goods
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Excludability
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Ê People can be prevented from enjoying the
good.
Ê Laws recognise and enforce private property
rights
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Rivalness
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Public Goods
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Common Resources
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Natural Monopolies
Ê Are neither excludable nor rival
Ê Are rival but not excludable.
Ê Are excludable but not rival.
Types of Goods
Public Goods
Rival?
Yes
Private Goods
Yes
No
No
Natural Monopoly
• Ice-cream cones
• Fire protection
• Clothing
• Cable TV
• Congested toll roads • Uncongested toll
roads
Excludable? Common
Resources
• Fish in the ocean
• The environment
• Congested nontoll
roads
Private Goods
Ê Are both excludable and rival.
Ê One person’s use of the good reduces the
benefits available to others.
When a good does not have a price
attached to it, private markets cannot
ensure that the good is produced and
consumed in the proper amounts
In such cases, government policy can
potentially remedy the market failure that
results and raise economic well-being.
Public Goods
• National defence
• Knowledge
• Uncongested nontoll
roads
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Goods that are not excludable and,
therefore, are available to everyone free
of charge.
Ê Externalities arise because something of value
has no price attached to it.
Ê People receive benefits without having to
compensate anyone for the use of scarce
resources.
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Solution to the Free-Rider
Problem
The Free-Rider Problem
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A free-rider is a person who receives the
benefit of a good but avoids paying for it.
Since people cannot be excluded from
enjoying the benefits of a public good,
individuals may withhold paying for the
good hoping that others will pay for it.
The free-rider problem prevents private
markets from supplying public goods.
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Some Important Public Goods
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National Defence
Basic Research
Programmes to Fight Poverty
The government should provide the good
if its total benefits exceed the costs.
The government can make everyone
better off by providing the good and
paying for it with tax revenue.
Cost-Benefit Analysis
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A cost-benefit analysis would be used to
estimate the total costs and benefits of
the project to society as a whole.
Ê It is difficult to do because of the absence of
prices needed to estimate social benefits and
resource costs.
Ê The value of life, the consumer’s time, and
aesthetics are difficult to assess.
Common Resources
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Common resources are not excludable.
That is, they are available free of charge
to anyone who wishes to use them
Common resources are rival goods
because one person’s use of the common
resource reduces other people’s use.
Tragedy of the Commons
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When a person uses a common resource,
he or she diminishes other people’s
enjoyment of it. This is known as the
Tragedy of the Commons.
Ê Thus, common resources tend to be used
excessively.
Ê This creates a negative externality
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Government can impose a tax or regulate
the use of the common resource or turn
the common resource into a private good.
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Examples of Common
Resources
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Clean air and water
Oil pools
Congested roads
Fish, whales, and other wildlife
Importance of Property Rights
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Government can potentially
solve the problem...
...by defining property rights and letting
market forces work toward economic
efficiency
...by regulating the private behaviour that
is causing overuse
...by supplying the good.
The market fails to allocate resources
efficiently when property rights are not
well-established
When the absence of property rights
causes a market failure, the government
can potentially solve the problem.
Conclusions
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Goods differ in whether they are
excludable and whether they are rival.
Markets work best for private goods,
which are both excludable and rival.
Public goods are neither rival nor
excludable.
Because of the free-rider problem,
governments provide public goods.
Conclusions
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Common resources are rival but not
excludable.
Because people are not charged for their
use of common resources, they tend to
use them excessively.
Government tries to reduce the use of
common resources through regulation and
taxation.
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