Chapter 19 Public Goods and the Tragedy of

Chapter 19 Public Goods and the Tragedy of the Commons MODERN PRINCIPLES OF ECONOMICS Third Edition

Outline § Four Types of Goods § Private Goods and Public Goods § Nonrival Private Goods Common Resources and the Tragedy of the Commons 2

Introduction § On September 29, 2004, asteroid Toutatis narrowly missed Earth. § Markets provide all kinds of goods like food, clothing, and cell phones. § Even if everyone were convinced of the benefits of deflecting asteroids, the market will probably never provide asteroid deflection. § i. e. market failure NASA/JPL-CALTECH Asteroid Toutatis 3

Definition Nonexcludable: a good is nonexcludable if people who don’t pay cannot be easily prevented from using the good. Example: National Defense 4

Definition Nonrival: A good is nonrival if one person’s use of the good does not reduce the ability of another person to use the same good. Example: Digital music 5

Introduction § Asteroid deflection is a public good: • Nonexcludable – nonpayers can’t be excluded from enjoying the benefits. • Nonrival – many people can enjoy the benefits of the same asteroid deflection. § A pair of jeans are an example of a private good: • Nonpayers can be excluded from consuming them. • Only one person can wear them at a time. 6

Four Types of Goods 7

Self-Check A fireworks display is an example of a: a. Public good. b. Private good. c. Common resource. Answer: a – a fireworks display is a public good because it is both nonrival and nonexcludable. 8

Definition Private goods: are excludable and rival. Public goods: are nonexcludable and nonrival. 9

Private Goods § Since private goods are excludable, there is an incentive to pay for and thus to produce them. § Private goods can therefore be provided by the market. § Excludability doesn’t result in inefficiency. § The only people who will be excluded from consuming a private good are the people who are not willing or able to pay what it costs to produce. 10

Public Goods § Since public goods are nonexcludable, it’s difficult to get people to pay for them voluntarily. § Markets will tend to underprovide public goods. § Public goods are also nonrival, which means that one person’s use doesn’t reduce the ability of another person to use the good. § 7 billion people can be protected from an asteroid for the same cost as protecting 1 million people. 11

Definition Free rider: someone who enjoys the benefits of a public good without paying a share of the costs. Forced rider: someone who pays a share of the costs of a public good but who does not enjoy the benefits. 12

Public Goods § Because public goods are nonexcludable, some people will free ride. § If people free ride, the good will be underprovided by the market. § By taxing everyone to pay for the public good, government can make people better off. § Taxation means that some people will be turned into forced riders. § In principle, the government should produce the amount that maximizes total surplus 13

Public Goods § If the government provides the public good, how much should it produce? § Ideally, the amount that maximizes total surplus § i. e. Societal benefits need to be larger than societal costs § The total benefit of a public good is the sum of the benefits to each individual. § How will the government know how much each person values the good? § Voting and other democratic processes can help to produce optimal amounts of public goods. 14

Public Goods § § § Is healthcare a public good? Very important service Is it excludable? Is it rival? Healthcare is a Private Good by definition Are there Free Riders with the ACA? Note: Just because government provides a good, does not mean it is a public good § Even essential goods (electricity) are not necessarily public goods 15

Self-Check Someone who enjoys the benefits of a public good without paying some of the cost is called a: a. Public good consumer. b. Forced rider. c. Free rider. Answer: c – someone who enjoys a public good without paying the cost is called a free rider. 16

Definition Nonrival Private goods: goods that are excludable but nonrival. Sometimes called Club Goods Examples: Cable TV, wi-fi, digital music 17

Nonrival Private Goods § Nonrival Private goods like television, music, and software excludable but nonrival. § Markets can provide club goods, but will be inefficient. § Some people who are willing to pay the cost (MC) but not the market price will be excluded. § MC can be very low, near zero, but price prevails § Entrepreneurs try to find ways to: • Turn public goods into club goods. • Profit from nonrival goods without relying on exclusion. 18

Nonrival Private Goods § Are radio/TV public goods or private goods? • Excludable? No • Rival? No • Must be Public Goods § How can the market provide public goods? § Some public goods such as radio and television programs are provided by markets. § Advertisers pay for the costs of the good that is then given away for free. 19

Nonrival Private Goods § Some nonrival goods such as Google searches are provided free even when they are excludable. § Other goods such as Wi-Fi are sold by private firms, paid for by advertising, given away to attract customers, or provided by local governments. § Markets can provide these goods but do so at an inefficient level. § Entrepreneurs sometimes find clever ways to profit from nonrival private goods, even without exclusion. 20

Definition Common resources: goods that are nonexcludable but rival. Examples: the environment, public roads, fish in the ocean (tuna) 21

Tragedy of the Commons § Until they are caught, tuna are unowned and hence nonexcludable. § But tuna are not public goods – when one person consumes a tuna, there is less for others. § Can you say “negative externality? ” § Without ownership, there is very little incentive to conserve. § There is a strong incentive to consume these resources before others. § Tuna are being driven towards extinction. 22

Tragedy of the Commons Since 1960, the tuna catch has decreased by 75%. 23

Tragedy of the Bunnies § You are a bunny merchant, and the way you make a living is to sell adorable bunnies to little children each year (you sell bunnies by clicking on them). § The “tragedy of the bunnies” game is played in two rounds (two consecutive seasons). After the first round, the remaining bunnies triple in number (they are bunnies, after all). § In the game, you compete against two other bunny merchants. Your goal is to bring the most bunnies to market that you can by the end of round two. § There are two versions of this game – public bunnies, and private bunnies. After playing both versions of the game, you will understand the “tragedy of the bunnies. ” 24

Tragedy of the Bunnies § § § Tragedy of the Bunnies game: Public and Private versions Two rounds of play Bunnies at the end of Round 1 multiply X 3 Winner – whoever has the most bunnies at the end § http: //bunnies. learnliberty. org/ 25

Tragedy of the Commons § The result of nonexcludability and rivalry is often overexploitation and undermaintenance. § When resources are unowned, users do not invest in maintenance because the benefits are mostly external. § Game preserves (private property) protect endangered species in Africa, etc § Will chickens ever go extinct? § “No one ever washed a rental car. ” • i. e. If you don’t own it, you don’t take care of it. 26

Definition Tragedy of the commons: the tendency of any resource that is unowned and hence nonexcludable to be overused and undermaintained. http: //www. garretthardinsociety. org/articles/art _tragedy_of_the_commons. html 27

Managing Common Resources § Elinor Ostrom found that all over the world, groups have avoided the tragedy of overfishing or overgrazing through the enforcement of norms. § This is more difficult to do when a lot of unrelated people have access to the common resource. © EPA EUROPEAN PRESSPHOTO AGENCY B. V. /ALAMY Elinor Ostrom Winner of the Nobel Prize in Economics in 2009 28

Communal Property The first Thanksgiving in America: A celebration of private property? The Pilgrims and Property Rights: https: //www. youtube. com/watch? v=66 Qd. QErc 8 JQ&feature=youtu. be 29

Communal Property The first Thanksgiving definitively illustrates the crippling problems with collectivism and the solution consisting of property rights. Communal property resulted in half the settlers starving to death in 1620. Governor Bradford instituted private property and the Tragedy of the Commons was reversed - something to celebrate! The solution to the Tragedy of the Commons is to avoid unowned or collective resources. http: //www. forbes. com/sites/jerrybowyer/2012/11/21/how-a-failedcommune-gave-us-what-is-now-thanksgiving/ 30

Command Control § Command control has been used to solve the tragedy of the commons problems. § In 1968, British Columbia limited boats to protect their salmon fishery. § Fishermen used “capital stuffing” – more powerful engines and better electronics for finding fish. § The value of the typical fishing boat tripled but the salmon fishery continued to decline. 31

Tradable Allowances § Property rights as a possible solution: § In 1986, New Zealand tried individual transferable quotas (ITQs). § Each owner of an ITQ had the right to catch a certain tonnage of fish. § The sum of ITQs added up to the total allowable catch, and ITQs could be bought and sold. § The scheme was successful and the fish catch increased. § Many similar programs have being instituted. 32

Tradable Allowances ITQs begin in 1986 33

Self-Check The tendency for common resources to be overused and undermaintained is called: a. Tragedy of the commons. b. Command control. c. Tradable allowances. Answer: a – this tendency is called the tragedy of the commons. 34

The Big Commons – Global Warming § The ocean of air (atmosphere) is the commons. § Everyone deposits CO 2 into the commons (non-excludable but rival) § Some scientists claim this will cause serious environmental damage, somewhere in 50 to 200 years. § All countries must participate for a solution but huge equity issues will block cooperation • Poor countries need electricity, economic development and funding from rich countries • Rich countries can’t pay without voter revolts 35

The Big Commons – Global Warming § Best solution: monitor, evaluate, innovate? • Where will technology be in 50 years? § Climate models are significantly overpredicting warming at this point 36

The Big Commons – Global Warming § Do we need one world government (totalitarian) control? • “Degrowth” • People in wealthy countries must be forced to give up comfortable lifestyles under current policy proposals (even poor people in rich countries) • This collectivist solution is not being debated/discussed directly as of yet. • The track record of collectivism has been deadly § “The urge to save humanity is almost always a false front for the urge to rule. “ § - H. L. Mencken 37

Takeaway § Public goods are valuable but markets will often undersupply these goods. § Public goods are nonexcludable and nonrival; nonexcludability is usually the more important problem. § The benefit of providing public goods is an argument for government taxation and supply. 38

Takeaway § A resource that is nonexcludable but rival will tend to be overused and under maintained. § Sometimes there are creative solutions to the tragedy of the commons, such as instituting new property rights. 39