public goods and common resources. characterizations of goods, services or resources excludability:...

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– McDo-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• McDo-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 gridNB 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 PubG, the SMB is the vertical sum of PMB at each qty.

• For a PrivG, the SMB is the horizontal sum of PMB at each price.

• Other example: Helicopters for Canadian peacekeeping

Public provision of PubG

• Done through political process.

Example:

• PubG: 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 PubG >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?