Public Goods and
Common Resources

PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

1

The Different Kinds of Goods
• Excludability
– Property of a good whereby a person can be prevented from using it

• Rivalry in consumption
– Property of a good whereby one person’s use diminishes other people’s use

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2

Figure 1
Four Types of Goods

Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one person’s use of the good diminishes other people’s use of it. This diagram gives examples of goods in each category.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3

The Different Kinds of Goods
• Private goods
– Excludable & Rival in consumption

• Public goods
– Not excludable & Not rival in consumption

• Common resources
– Rival in consumption & Not excludable

• Club goods
– Excludable & Not rival in consumption
– One type of natural monopoly
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4

The Different Kinds of Goods
• Public goods & Common resources
– Not excludable
• People cannot be prevented from using them

– No price attached to it
– External effects
• Positive externalities
• Negative externalities

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5

The Different Kinds of Goods
• Public goods & Common resources
– Private decisions about consumption and production • Can lead to an inefficient allocation of

resources

– Government intervention
• Can potentially raise economic well-being

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6

Public Goods
• Free rider
– Person who receives the benefit of a good but avoids paying for it

• The free-rider problem
– Public goods – not excludable
– Prevents the private market from supplying the goods

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7

Public Goods
• Government can remedy the free-rider problem – If total benefits of a public good exceeds its costs
– Provide the public good
– Pay for it with tax revenue
– Make everyone better off

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8

Public Goods
• Some important public goods
–