What are the two characteristics to group various goods in an economy? (2 questions to ask)
What are the answer combos?
- Is the good excludable? Can people be prevented from using there good?
- Is the good rival in consumption? Does one person’s use of the good diminish another person’s ability to use it?
If both yes, private goods
If both no, public goods
If 1 yes and 2 no, then club goods
If 1 no and 2 yes, then common resources
Table on page 222
What are the four categories goods are divided into?
Private goods- goods that are excludable and rival (ice cream cone is possible to prevent someone from eating one and if someone eats an ice cream cone another person can’t eat the same one)
Public goods- neither excludable or rival (tornado siren, once sounds impossible to not hear it, equally benefits everyone)
Common resources- rival but not excludable (fish in the ocean when person catches one fish there are fewer for others to catch but ocean so big you can’t stop people from fishing out of it)
Club goods- excludable but not rival (fire protection in a town can easily exclude people
By letting their house burn down but once a fire dept is paid for the additional cost of protecting another house is small)
What is a positive externality and negative externality in goods without a market price?
Positive- tornado siren (public good) since one person provides a good that makes everyone better off at no cost
Negative- one person fishing in the ocean (common resource) makes others worse off because there are fewer fish to catch
Positive is public good
Negative is common resources
What is a free rider?
A person who receives the benefit of a good bit avoids paying for it
Ex: a person who does not buy a ticket to see fireworks but can see them from a distance anyway
People have incentive to be free riders rather than ticket buyers so the market would fail to produce an efficient income
Public goods are not excludable, the free rider problem prevents the private market from supplying them
What are the 3 most important public goods?
National defence- government pays for it so everyone enjoys it equally and one person’s use does not take away from another person’s
Basic research- general knowledge is a public good and can’t be patented (like a theorem)
People free ride on general knowledge to create products
Fighting poverty- can’t be eliminated through private charity cause of the free rider problem, government must regulate this
Case study page 225
What is a cost benefit analysis?
A study that compares the costs and benefits to society of providing a public good
Government hiring economists and engineers to judge whether a highway would have more benefits to the people that would use it compared to cost of maintaining and building it
Tough because asking people how much they value something they don’t have to pay for is not quantifiable
What is the tragedy of commons?
A parable that illustrates why common resources get used more than is desirable from the standpoint of a society as a whole
When one person uses a common resource, that person diminishes other people’s enjoyment of it and because of this negative externality, common resources are used excessively until governments tax or turn it into a private good
What are the 3 main important common resources?
- Clean air and water- common resources that pollution can degrade, environmental degradation is modern tragedy of commons
- Congested roads- roads can be either public goods or common resources but when congested it is a common resource, gasoline tax or tolls can reduce this
- Fish, whales, and other wildlife- any solution requires international solution since multiple country’s touch oceans
