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“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…

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Слайд 111
Public Goods and Common Resource

11Public Goods and Common Resource

Слайд 2“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. . .”Free goods provide a special challenge for economic analysis.Most

Слайд 3“The best things in life are free. . .”
Let’s start

with the game.
The rules are following:
Each player may contribute any

amount between 0 and 2 zloty.
Then I will count the total amount and give exactly the same amount to the pool, which then be distrubuted among the students – each will get the same amount.
If there are 10 students and each contributes 2 złoties, I will add 20 zloties and each student will get 4 zloties back.
If each students contributes 0, I will add 0 too
“The best things in life are free. . .”Let’s start with the game.The rules are following:Each player

Слайд 4“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 goods are available free of charge, the market

Слайд 5“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. . .”When a good does not have a price attached

Слайд 6“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 best things in life are free. . .”In such cases, government policy can potentially remedy the

Слайд 7THE 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 GOODSWhen thinking about the various goods in the economy, it is useful

Слайд 8THE 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 ExcludabilityExcludability refers to the property of a good whereby a person

Слайд 9THE DIFFERENT KINDS OF GOODS
Four Types of Goods
Private Goods
Public Goods
Common

Resources
Natural Monopolies

THE DIFFERENT KINDS OF GOODSFour Types of GoodsPrivate GoodsPublic GoodsCommon ResourcesNatural Monopolies

Слайд 10THE 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.
THE DIFFERENT KINDS OF GOODSPrivate GoodsAre both excludable and rival.Public GoodsAre neither excludable nor rival.Common ResourcesAre

Слайд 11Figure 1 Four Types of Goods
Copyright © 2004 South-Western
Rival?
Yes
Yes
No
Private Goods
Natural

Monopolies
No
Excludable?
Common Resources
Public Goods

Figure 1 Four Types of GoodsCopyright © 2004 South-WesternRival?YesYesNoPrivate GoodsNatural MonopoliesNoExcludable?Common ResourcesPublic Goods

Слайд 12PUBLIC GOODS
Example
A firework display in a small town (500 inhabitants).

The value for each of them is $10.
The cost is

$1000.
Would the private market produce the efficient outcome?
No, due to free-riding
A free-rider is a person who receives the benefit of a good but avoids paying for it.


PUBLIC GOODSExample A firework display in a small town (500 inhabitants). The value for each of them is

Слайд 13The Free-Rider Problem
Since people cannot be excluded from enjoying the

benefits of a public good, individuals may withhold paying for

the good hoping that others will pay for it.
The free-rider problem prevents private markets from supplying public goods.
The Free-Rider ProblemSince people cannot be excluded from enjoying the benefits of a public good, individuals may

Слайд 14The Free-Rider Problem
Solving the Free-Rider Problem
The government can decide

to provide the public good if the total benefits exceed

the costs.
The government can make everyone better off by providing the public good and paying for it with tax revenue.
The Free-Rider Problem Solving the Free-Rider ProblemThe government can decide to provide the public good if the

Слайд 15Some Important Public Goods
National Defense
Basic Research
Fighting Poverty

Some Important Public GoodsNational DefenseBasic ResearchFighting Poverty

Слайд 16CASE STUDY: Are Lighthouses Public Goods?

CASE STUDY: Are Lighthouses Public Goods?

Слайд 17The Difficult Job of Cost-Benefit Analysis
Cost benefit analysis refers to

a study that compares the costs and benefits to society

of providing a public good.
In order to decide whether to provide a public good or not, the total benefits of all those who use the good must be compared to the costs of providing and maintaining the public good.

The Difficult Job of Cost-Benefit AnalysisCost benefit analysis refers to a study that compares the costs and

Слайд 18The Difficult Job of Cost-Benefit Analysis
A cost-benefit analysis would be

used to estimate the total costs and benefits of the

project to society as a whole.
It is difficult to do because of the absence of prices needed to estimate social benefits and resource costs.
The value of life, the consumer’s time, and aesthetics are difficult to assess.
The Difficult Job of Cost-Benefit AnalysisA cost-benefit analysis would be used to estimate the total costs and

Слайд 19CASE STUDY: How much is a life worth?
Suppose that at

the cost of $10 000 you can have a traffic

light at a town intersection.
This will reduce the risk of a fatal accident over the lifetime of the traffic light from 1.6 to 1.1 percent.
Should the new lights be installed and operated?
How to determine the value of person’s life?
CASE STUDY: How much is a life worth?Suppose that at the cost of $10 000 you can

Слайд 20CASE STUDY: How much is a life worth?
How to determine

the value of person’s life?
Total amount of money a person

would have earned if he had lived
What about retired or disabled person?
Compare risk and remuneration. The value of a human life calculated this way is about $10 million.

Therefore in the traffic lights case it makes sense to approve the project.


CASE STUDY: How much is a life worth?How to determine the value of person’s life?Total amount of

Слайд 21COMMON RESOURCES
Common resources, like public goods, are not excludable. They

are available free of charge to anyone who wishes to

use them.
COMMON RESOURCESCommon resources, like public goods, are not excludable. They are available free of charge to anyone

Слайд 22COMMON RESOURCES
Common resources are rival goods because one person’s use

of the common resource reduces other people’s use.

COMMON RESOURCESCommon resources are rival goods because one person’s use of the common resource reduces other people’s

Слайд 23Tragedy of the Commons
The Tragedy of the Commons is a

parable that illustrates why common resources get used more than

is desirable from the standpoint of society as a whole.
Common resources tend to be used excessively when individuals are not charged for their usage.
This is similar to a negative externality.
Tragedy of the CommonsThe Tragedy of the Commons is a parable that illustrates why common resources get

Слайд 24Tragedy of the Commons – an example
An example, by Garrett

Hardin (1968)
There are 5 farmers and each of them has

got 2 cows.
The supply of grass is: S = 12 – q, where: q is a number of cows on the grass-land.
The benefit to each farmer is a sum of what his cows manage to graze.
The private cost of the common grass-land is zero to each farmer.
Tragedy of the Commons – an exampleAn example, by Garrett Hardin (1968)There are 5 farmers and each

Слайд 25Tragedy of the Commons – an example
What is optimal number

of my cows on the grazing?
2 and profit is 4,

as all farmers do the same
But what if all farmers send just one cow?
then profit goes up to 7
Tragedy of the Commons – an exampleWhat is optimal number of my cows on the grazing? 2 and

Слайд 26Tragedy of the Commons – an example
Possible solutions:
Privatization (It took

place in England in 17th century (enclosure movement)
Taxation. A tax

on farmer if he grazes more than one cow is 10, then the net benefit is given bellow:
Tragedy of the Commons – an examplePossible solutions:Privatization (It took place in England in 17th century (enclosure

Слайд 27Some Important Common Resources
Clean air and water
Congested roads
Fish, whales, and

other wildlife

Some Important Common ResourcesClean air and waterCongested roadsFish, whales, and other wildlife

Слайд 28CASE STUDY: Why Isn’t the Cow Extinct?
Will the market protect

me?
Private
Ownership and
the Profit
Motive!

CASE STUDY: Why Isn’t the Cow Extinct?Will the market protect me?PrivateOwnership and the Profit Motive!

Слайд 29In the news: Economics of Road Pricing
An observation:
No city has

ever been able to solve its congestion and pollution problems

by building more roads.
Why?
More roads encourage more people to use their cars!
Is there any solution to congestion and pollution?
YES!!!!
ROAD PRICING
In the news: Economics of Road PricingAn observation: No city has ever been able to solve its congestion

Слайд 30In the news: Economics of Road Pricing
Road pricing, where price

depends on:
Road drivers use
Time of day, week and the year
Degree

of pollution problem at the moment
In Singapore this system has been working (perfectly) for more than 20 years.
In addition there are auctions for different types of plates (one that allows driving only during weekends is cheaper than the one that allows driving 7 days a week)
In the news: Economics of Road PricingRoad pricing, where price depends on:Road drivers useTime of day, week

Слайд 31CONCLUSION: THE IMPORTANCE OF PROPERTY RIGHTS
The market fails to allocate

resources efficiently when property rights are not well-established (i.e. some

item of value does not have an owner with the legal authority to control it).
CONCLUSION: THE IMPORTANCE OF PROPERTY RIGHTSThe market fails to allocate resources efficiently when property rights are not

Слайд 32CONCLUSION: THE IMPORTANCE OF PROPERTY RIGHTS
When the absence of property

rights causes a market failure, the government can potentially solve

the problem.
CONCLUSION: THE IMPORTANCE OF PROPERTY RIGHTSWhen the absence of property rights causes a market failure, the government

Слайд 33Summary
Goods differ in whether they are excludable and whether they

are rival.
A good is excludable if it is possible to

prevent someone from using it.
A good is rival if one person’s enjoyment of the good prevents other people from enjoying the same unit of the good.
SummaryGoods differ in whether they are excludable and whether they are rival.A good is excludable if it

Слайд 34Summary
Public goods are neither rival nor excludable.
Because people are not

charged for their use of public goods, they have an

incentive to free ride when the good is provided privately.
Governments provide public goods, making quantity decisions based upon cost-benefit analysis.
SummaryPublic goods are neither rival nor excludable.Because people are not charged for their use of public goods,

Слайд 35Summary
Common resources are rival but not excludable.
Because people are not

charged for their use of common resources, they tend to

use them excessively.
Governments tend to try to limit the use of common resources.
SummaryCommon resources are rival but not excludable.Because people are not charged for their use of common resources,

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