PowerPoint Lecture Notes for Chapter 11: Public Goods and Common Resources Principles of Microeconomics 4th edition,

by N. Gregory Mankiw PowerPoint Slides by Ron Cronovich

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Public Goods and Common Resources

PRINCIPLES OF

This chapter is shorter than average. (In many other textbooks, a single chapter combines this material with externalities.) Its also less analytically challenging than average, so most students find it less difficult especially when covered immediately after the externalities chapter. Most instructors are able to cover this chapter in a single class session. In the textbook itself, the fourth edition adds two brand-new In the News boxes which your students will find interesting. This PowerPoint presentation includes a case study on Spam email. This case study does not appear in the textbook.

MICROECONOMICS
F OURT H E DITIO N

N. G R E G O R Y M A N K I W
PowerPoint Slides by Ron Cronovich
2007 Thomson South-Western, all rights reserved

In this chapter, look for the answers to these questions: What are public goods?
What are common resources? Give examples of each.

Why do markets generally fail to provide the

efficient amounts of these goods?

How might the government improve market

outcomes in the case of public goods or common resources?

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Introduction We consume many goods without paying:

parks, national defense, clean air & water.

When goods are free, the market forces that

normally allocate resources are absent.

The private market may fail to provide the

socially efficient quantity of such goods.

One of the Ten Principles from Chapter 1:

Governments can sometimes improve market outcomes.
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Important Characteristics of Goods

A good is excludable if a person can be prevented
from using it. excludable: fish tacos, dial-up internet service not excludable: FM radio signals, national defense

A good is rival in consumption if one persons

use of it diminishes others use. rival: fish tacos not rival: An MP3 file of Coldplays latest hit song

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The Different Kinds of Goods

Private goods: excludable, rival in consumption example: food Public goods: not excludable, not rival example: national defense Common resources: rival but not excludable example: fish in the ocean Natural monopolies: excludable but not rival example: cable TV

Using the two characteristics on the preceding slide, we can classify most goods in one of the four categories on this slide. As each example displays, explain why it belongs to its category/classification. E.g., food is a private good because 1) it is excludable: you cannot have any unless you buy it
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2) it is rival in consumption: if you eat that fish taco, I wont be able to eat it

ACTIVE LEARNING

Categorizing roads

1:

A road is which of the four kinds of goods? Hint: The answer depends on whether the road
is congested or not, and whether its a toll road or not. Consider the different cases.

This brief exercise gives students practice applying the definitions of rival and excludable and the four different types of goods. Suggestion: Tell students they have 1-2 minutes to formulate an answer, then another 2 minutes to compare their answer with that of one student sitting near them. Then ask for students to volunteer their responses.
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If youre pressed for time, you can safely omit this exercise. Students can get this information from a careful reading of the chapter.

ACTIVE LEARNING

Answers

1:

Rival in consumption? Only if congested. Excludable? Only if a toll road. Four possibilities
uncongested non-toll road: public good uncongested toll road: natural monopoly congested non-toll road: common resource congested toll road: private good
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The Different Kinds of Goods This chapter focuses on public goods and
common resources.

For both, externalities arise because something

of value has no price attached to it.

So, private decisions about consumption and

production can lead to an inefficient outcome.

Public policy can potentially raise economic

well-being.

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Public Goods Public goods are difficult for private markets to

provide because of the free-rider problem.

The textbook exposits these ideas using a simple example a fireworks display in Smalltown, U.S.A. The Study Guide offers another example, in which the cost of installing a streetlight in a neighborhood is less than the collective benefits of the people who live on that street yet, no one takes the initiative to provide it.

Free rider: a person who receives the benefit of

a good but avoids paying for it If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good.

Result: The good is not produced, even if

buyers collectively value the good higher than the cost of providing it.
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Public Goods
If the benefit of a public good exceeds the cost of
providing it, govt should provide the good and pay for it with a tax on people who benefit.

Problem: Measuring the benefit is usually difficult. Cost-benefit analysis: a study that compares
the costs and benefits of providing a public good

Cost-benefit analyses are imprecise, so the

efficient provision of public goods is more difficult than that of private goods.

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Some Important Public Goods National defense Knowledge created through basic research Fighting poverty

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Common Resources Like public goods, common resources are not

excludable. cannot prevent free riders from using little incentive for firms to provide role for govt: seeing that they are provided

Additional problem with common resources:

rival in consumption each persons use reduces others ability to use role for govt: ensuring they are not overused
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The Tragedy of the Commons

A parable that illustrates why common resources

get used more than is socially desirable.

Setting: a medieval town, where sheep graze on

common land.

As the population grows, the # of sheep grows. The amount of land is fixed,
the grass begins to disappear from overgrazing.

The private incentives (using the land for free)

outweigh the social incentives (using it carefully).

Result: People can no longer raise sheep.

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The Tragedy of the Commons

The tragedy is due to an externality:

Allowing ones flock to graze on the common land reduces its quality for other families.

People neglect this external cost, resulting in

overuse of the land.

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ACTIVE LEARNING

2: Policy options for common resources

What could the townspeople

(or their government) have done to prevent the tragedy?

If youre pressed for time, you can safely omit this exercise. Its contents will be covered in a subsequent slide, and students can learn this material from a careful reading of the chapter. This exercise has several objectives: 1) It gets students to anticipate the policy solutions to the common resource problem based on what they have just learned about the problem.
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Try to think of two or three options.

2) After giving students a big hint on the preceding slide, it tests to see whether they make the connection between the common resource problem and the policies to deal with negative externalities they learned in the preceding chapter. To get through this activity quickly, display the question, give students a quiet moment to formulate their responses, then ask for students to share their answers. If you can spare an extra couple of minutes, have them work in pairs two minutes should suffice and then ask students to share their answers.

ACTIVE LEARNING

Answers

2:

impose a corrective tax on the use of the land

to internalize the externality

All of these policy options have been used in modern times to deal with the common resource problem. The following slide shows a few examples.

regulate use of the land (the command-andcontrol approach)

auction off permits allowing use of the land divide the land, sell lots to individual families
Each family will have incentive not to overgraze its own land.

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Policy Options to Prevent Overconsumption of Common Resources

The electromagnetic frequency spectrum is a common resource. It is not excludable: anyone with the right equipment could use it. It is rival in consumption: theres a limited amount of spectrum available. The U.S. FCC has been auctioning licenses to use parts of the spectrum since 1994. These auctions raise substantial revenue for the federal government, and help allocate spectrum efficiently (firms that can use it most productively bid the most in the auctions).

regulate use of the resource impose a corrective tax to internalize the

externality example: hunting & fishing licenses, entrance fees for congested national parks

auction off permits allowing use of the resource

example: spectrum auctions by the U.S. Federal Communications Commission

if the resource is land, convert to a private good

by dividing and selling parcels to individuals
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Some Important Common Resources Clean air and water Congested roads Fish, whales, and other wildlife

Regarding congested roads: please encourage your students to read the new In the News box entitled A Solution to City Congestion.

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CASE STUDY:

This case study is not in the textbook.

Youve Got Spam!

Spam e-mail is a service

some firms use to advertise their products.

Spam is not excludable:

Firms cannot be prevented from spamming.

Spam email is named after everyones favorite delicacy.

Spam is rival: As more

companies use spam, it becomes less effective.

Thus, spam is a common resource. Like most common resources, spam is overused
which is why we get so much of it!
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CONCLUSION
Public goods tend to be under-provided, while
common resources tend to be over-consumed.

These problems arise because property rights

are not well-established:

Nobody owns the air, so no one can charge polluters. Result: too much pollution. Nobody can charge people who benefit from national defense. Result: too little defense.

The govt can potentially solve these problems

with various policy options.
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CHAPTER SUMMARY A good is excludable if someone can be prevented

from using it. A good is rival in consumption if one persons use reduces others ability to use the same unit of the good.

Markets work best for private goods, which are

excludable and rival in consumption. Markets do not work well for other types of goods.

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CHAPTER SUMMARY Public goods, such as national defense and

fundamental knowledge, are neither excludable nor rival in consumption.

Because people do not have to pay to use them,

they have an incentive to free ride, and firms have no incentive to provide them.

Therefore, the government provides public goods,

using cost-benefit analysis to determine how much to provide.

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CHAPTER SUMMARY Common resources are rival in consumption but

not excludable. Examples include common grazing land, clean air, and congested roads.

People can use common resources without

paying, so they tend to overuse them. Therefore, governments try to limit the use of common resources.

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