In this chapter we examine the problems that arise for goods without market prices. After completing this chapter, students will be able to: Learn the defining characteristics of public goods and common resources, examine why private markets fail to provide public goods, consider some of the important public goods in our economy,. | 11 Public Goods and Common Resource “The best things in life are free. . .” Free goods provide a special challenge for economic analysis. Most goods in our economy are allocated in markets “The best things in life are free. . .” When goods are available free of charge, the market forces that normally allocate resources in our economy are absent. “The best things in life are free. . .” When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in the proper amounts. “The best things in life are free. . .” In such cases, government policy can potentially remedy the market failure that results, and raise economic well-being. THE DIFFERENT KINDS OF GOODS When thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the good excludable? Is the good rival? THE DIFFERENT KINDS OF GOODS Excludability Excludability refers to the property of a good whereby a person can be . | 11 Public Goods and Common Resource “The best things in life are free. . .” Free goods provide a special challenge for economic analysis. Most goods in our economy are allocated in markets “The best things in life are free. . .” When goods are available free of charge, the market forces that normally allocate resources in our economy are absent. “The best things in life are free. . .” When a good does not have a price attached to it, private markets cannot ensure that the good is produced and consumed in the proper amounts. “The best things in life are free. . .” In such cases, government policy can potentially remedy the market failure that results, and raise economic well-being. THE DIFFERENT KINDS OF GOODS When thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the good excludable? Is the good rival? THE DIFFERENT KINDS OF GOODS Excludability Excludability refers to the property of a good whereby a person can be prevented from using it. Rivalry Rivalry refers to the property of a good whereby one person’s use diminishes other people’s use. THE DIFFERENT KINDS OF GOODS Four Types of Goods Private Goods Public Goods Common Resources Natural Monopolies THE DIFFERENT KINDS OF GOODS Private Goods Are both excludable and rival. Public Goods Are neither excludable nor rival. Common Resources Are rival but not excludable. Natural Monopolies Are excludable but not rival. Figure 1 Four Types of Goods Copyright © 2004 South-Western Rival? Yes Yes • Ice-cream cones • Clothing • Congested toll roads • Fire protection • Cable TV • Uncongested toll roads No Private Goods Natural Monopolies No Excludable? • Fish in the ocean • The environment • Congested nontoll roads • Tornado siren • National defense • Uncongested nontoll roads Common Resources Public Goods PUBLIC GOODS A free-rider is a person who receives the benefit of a good but avoids paying for it. The Free-Rider Problem Since people cannot be excluded .
