Public Goods and Common Resources Characterizations of Goods
Public Goods and Common Resources
Characterizations of Goods, Services or Resources Excludability: • Excludable when it is possible to prevent a person from enjoying its benefits. – – accounting services apple diamond mine concert.
Excludability: • Nonexcludable if it is virtually impossible to prevent someone from benefiting from it. – Fish in ocean – radio program – national defense – street light – air quality – Maintenance of dams and main canal in irrigation system.
Rivalry: • Rival if its use by one person decreases the qty available for someone else. – – – accounting services apple diamond mine Mc. Do-Cartier bridge on Monday morning Air quality
Rivalry • Nonrival if its use by one person does not decrease the qty available for someone else. • • • concert (if seats left) national defense radio program Mc. Do-Cartier bridge on Sunday morning Law and order
Where would you classify the following? • • • An idea Trees in the forest Music Software City park Excludability is generally a question of degree that may depend on law, norms, customs, and technology of both production and protection.
Classification of goods • Private goods: Rival and excludable. – apple – my garden – my office • Public goods: Nonrival and nonexcludable. – national defense – law and order – street lights
• Common resources: Rival and nonexcludable. – ocean fish – earth’s atmosphere • Natural monopolies: Nonrival but excludable. – Uncongested bridge – Uncongested cable TV – Uncongested internet – Uncongested electricity or phone grid NB Called natural monopoly because one firm can usually provide service at lower cost than two or more firms.
Public goods and the free-rider problem • Free rider: A person who enjoys the benefits of a good or service without paying for it. • Little incentive to contribute towards public goods. • Public goods are generally under-supplied without gvt intervention. • What is the right amount of PG to supply?
Example of PG • Lisa and Max • Common parking • No security lighting: – Nonexcludable – Nonrival (graphic)
• For a Pub. G, the SMB is the vertical sum of PMB at each qty. • For a Priv. G, the SMB is the horizontal sum of PMB at each price. • Other example: Helicopters for Canadian peacekeeping
Public provision of Pub. G • Done through political process. Example: • Pub. G: heli. for Peacekeeping missions • 2 parties: Doves and Hawks – Hawks prefer 300 heli – Doves prefer 100 heli – Rest of electoral platforms are identical
Political process • Same deadweight losses: Cannot predict election outcome • Not an equilibrium… • Equil at 200 heli. • Voters are indifferent and outcome is efficient. • Example of competition in the “political market-place” which leads to efficient resource allocation.
Political Process • Result depends on strong assumptions of perfect info re: – how voters compare parties’ platforms – what politicians know about voters’ welfare • 1. Informational problem: – When bureaucrats have different objectives than max social welfare and are better informed than voters and politicians. – eg: Bureaucrats may aim for max budget. • exaggerate costs of heli • Press for more heli • NB Remember importance of education for democracies: positive externalities.
• 2. Rational ignorance: When voter decides not to acquire info because MC of doing so is larger than expected MB. • Large no of voters implies MB of acquiring info is small compared to MC. • Technicalities are left to bureaucrats. • Heli. builders have large incentives to be well informed and lobby politicians. They have a disproportionate influence on decision to buy heli.
Explaining gvt growth? • 1. Changing voter preferences: Income elasticity of demand for Pub. G >1. – highways – airports – education – int’l peacekeeping
• 2. Inefficient provision: – Bureaucrats aim at budget max in the presence of rational voter ignorance.
COMMON RESOURCES • When resources are owned in common in such a way that they can be freely accessed, they will tend to be overexploited. – cod fisheries in Atlantic – GHG in atmosphere – forest in the Amazon Why?
Ex: The Fishery – The free access equilibrium (2 graphics)
The Fishery • The MPB is the catch that one fisher gets when he goes with his boat. • The MSB is the increase in the total catch of the fishery from that additional boat. • MSB accounts for the fact that adding a boat reduces the catch of all other boats.
• At the individual (private) level, each fisher does not account for the effect he has on other fishers. • He only cares about his own catch. Negative externality • NB After 5000 boats, MSB is actually negative! How is that possible?
• Tragedy of the Commons: Takes place when large number of people access a resource without any restriction. • Incentives to conserve are virtually absent: If I don’t catch the fish, someone else will. • Efficient use implies MPB>MC : – Individual incentives to overfish
Achieving efficiency 4 types of solutions: – Property rights – Quotas – ITQs – Managed CPR
1. The property rights solution • Give the fishery to one person: Social and private benefits coincide. Efficient • NB The problem was again one of absence of PR over a resource. • Other ex: Frequency spectrum for cell phones – gvt assigns PR through auctions
Problem with private PR: • • How does one enforce PR on the Atlantic? Amazonian forest? Atmosphere? A River? Calls for more direct gvt intervention.
Quotas • Set no. of boats at 4000. Efficient • Incentives to cheat may be large at 4000 boats. – Requires monitoring – Is no. of boats easier to verify than pure exclusion? – Iceland: Limiting no. of boats led boat owners to saw boats in two and make them longer to carry more fish… Inefficient
Individual Transferable Quotas • Same idea as transferable emissions permits • NB Not clear why this would reduce monitoring costs. Maybe because quotas will go to those who value them most?
Managed CPRs (Esp in LDCs) • Property in common but entry is not free. • Community has rules, social norms, customs, that can be enforced, including quotas. • People are punished for violating those rules. • Is a managed common a private PR with many owners or gvt intervention?
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