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Lecture Economics: Chapter 19 - Dean Karlan, Jonathan Morduch

Chapter 19 - Public goods and common resources. In this chapter you will learn: What the difference is between rival and excludable goods and services? What the free-rider problem is and what its consequences are? What the tragedy of the commons is and what its consequences are? How and when social norms, government regulation, and expansion of property rights can be used to solve problems with public goods or common resources? | Chapter 19 Public Goods and Common Resources © 2014 by McGraw-Hill Education 1 What will you learn in this chapter? • What the difference is between rival and excludable goods and services. • What the free-rider problem is and what its consequences are. • What the tragedy of the commons is and what its consequences are. • How and when social norms, government regulation, and expansion of property rights can be used to solve problems with public goods or common resources. © 2014 by McGraw-Hill Education 2 Characteristics of goods • There are two important characteristics that determine how goods are used and whether they are allocated efficiently by markets: – When a good is excludable, it is possible for sellers to prevent its use by those who have not paid for it. – When a good is rival in consumption (or just rival), one person’s consumption prevents or decreases others’ ability to consume it. © 2014 by McGraw-Hill Education 3 1 Characteristics of goods Four categories of goods and services based on excludability and rivalry. Excludable Not excludable Rival Not rival Many goods lack one or both of these characteristics. © 2014 by McGraw-Hill Education 4 Active Learning: Identify type of good For each of the following, identify what kind of good they are (private, public, artificially scarce, or common resource): 1. 2. 3. 4. 5. Popular software. AM/FM radio. Street art. A gaggle of geese. A motorcycle. © 2014 by McGraw-Hill Education 5 Allocation of goods • Whether a good is excludable and rival in consumption has important implications for how it is allocated through a market system. – Common resources are goods that are not excludable but are rival. – Artificially scarce goods are excludable, but not rival. • Markets work well for allocating private goods efficiently, but not always so well for allocating public goods and common resources. – Free-rider problem. – Tragedy of the commons. © 2014 by McGraw-Hill Education 6 2 The free-rider