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Examine goods that are non-excludable and non-rivalrous, and the challenges of managing shared resources.
Why is it that you can easily buy a private burger at a shop, but the world struggles to maintain clean air or prevent overfishing in the open ocean?
To understand market failures, we must categorize goods using two lenses: Excludability and Rivalry. A good is excludable if a person can be prevented from using it (usually by a price). A good is rival if one person's use diminishes another person's ability to use it.
1. Private Goods: Both excludable and rival (e.g., a candy bar). 2. Public Goods: Neither excludable nor rival (e.g., national defense). 3. Common Resources: Rival but not excludable (e.g., fish in the ocean). 4. Club Goods: Excludable but not rival (e.g., Netflix subscription).
Quick Check
If you are breathing air in a crowded room, is that air a 'Public Good' or a 'Common Resource'?
Answer
A Common Resource, because it is non-excludable (anyone can breathe it) but rival (your breathing reduces the oxygen available for others).
1. A neighborhood of 10 houses wants a security guard costing 150. Total Social Benefit is 150 \times 101,500 > 1,000$, the guard should be hired. 4. However, if one person pays, everyone benefits for free. Most neighbors will refuse to pay, hoping others will cover the cost. Result: No guard is hired.
Common resources face a different problem. Because they are rival but non-excludable, individuals neglect the negative externality they impose on others. When I catch a fish, there is one less fish for you. This leads to over-consumption. In economic terms, the individual follows their Marginal Private Benefit (), ignoring the increasing Marginal Social Cost (), leading to depletion.
Imagine a shared field where any farmer can graze cows. 1. Adding one more cow increases a farmer's profit by MPB120 (). 3. The individual farmer gains 20 net. 4. Because the farmer doesn't pay for the 'cost' of the grass, they keep adding cows until the field is a desert.
Quick Check
What is the primary reason common resources are overused while public goods are under-provided?
Answer
Common resources are rival (consumption hurts others), while public goods are non-rival (consumption doesn't hurt others).
To fix these failures, governments often intervene. For Public Goods, the government provides the good directly, funded by tax revenue. For Common Resources, the goal is to 'internalize the externality.' This can be done through: 1. Regulation: Setting limits (e.g., fishing seasons). 2. Taxes: Charging for use (Pigouvian taxes). 3. Property Rights: Turning the common resource into a private good so the owner has an incentive to preserve it.
Individual Transferable Quotas (ITQs) solve the tragedy by: 1. Calculating the sustainable total catch (). 2. Dividing that catch into 'shares' or property rights given to fishermen. 3. Allowing fishermen to buy/sell these shares. 4. This makes the resource 'excludable' to permit holders, giving them a financial stake in the long-term health of the fish population.
Which of the following is the best example of a Public Good?
The 'Free Rider' problem is most closely associated with which type of good?
The Tragedy of the Commons occurs because the Marginal Social Cost of using the resource is higher than the Marginal Private Cost.
Review Tomorrow
In 24 hours, try to draw the 2x2 matrix of goods and place 'Clean Air', 'A Private Gym', 'National Defense', and 'A Congested Highway' into the correct boxes.
Practice Activity
Look around your town. Identify one 'Public Good' provided by the government and explain what would happen if a private company tried to sell it for a profit.