L26 - Public Goods and Common Resources Flashcards Preview

18ECA002 - Principles of Microeconomics > L26 - Public Goods and Common Resources > Flashcards

Flashcards in L26 - Public Goods and Common Resources Deck (15)
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1
Q

What have we previously assumed about goods?

A

PREVIOUS: implicitly assumed that the goods and services are “well-behaved”
For example, we ‘ve assumed:
(a) to consume a good or service, consumers must purchase it
(b) consuming a unit of the good means others can’t consume that unit
- If so, markets are efficient (if markets are competitive and if no externalities)

  • If not, our above analysis does not apply
  • In such cases, the market will not lead to an efficient allocation of resources
  • Some form of government intervention will be necessary
2
Q

What are the 4 types of goods?

A
  • Rivalry
  • Non-rivalry
  • Excludability
  • Non-Excludability
3
Q

What are Rivalry and Non-Rivalry goods?

A
  • Imagine you are consuming a product: could another person come along and consume it at the same time?
  • If not, the product is called rival –> Why? Because the other person and you would be rivals for it

Rival products fall into three categories

(a) Some can be consumed only by one person
(b) Some can be consumed by more than one person, but not at same time
(c) Some can be consumed by more than one person at the same time, but not by another person at the same time

If so, the product is called non-rival

4
Q

What are Excludability and Non-Excludability?

A

Imagine you want to consume a product: could you be prevented from doing so if you refused to pay?

  • If so, the product is called excludable –> Why? Because you would be excluded from the products benefits
  • Excludable products fall into two categories
    (a) Products from which non-payers COULD BE excluded and ARE excluded
    (b) Products from which non-payers COULD BE excluded and ARE NOT
    excluded
  • If not, the product is called non-excludable
  • Sometimes it is difficult to decide whether a product or resource is excludable
    Changes in technology can transform a good from non-excludable to excludable
5
Q

What goods are Excludable and Rival?

A
  • PRIVATE GOODS
  • economic textbook
  • loaf of bread
  • cinema tickets (if full)
  • motorways (congested,tolls)
6
Q

What goods are Non-Excludable and Non- Rival?

A
  • PUBLIC GOODS
  • Street lighting
    fireworks display
  • TV channels (analogue)
  • Minor roads (without technology)
7
Q

What goods are Non-Excludable and Rival?

A
  • COMMON RESOURCES
  • fish in the ocean
  • environment
  • these are used more than is socially desirable
8
Q

What goods are Excludable and Non-Rival?

A
  • CLUB GOODS
  • TV channels (cable, satellite)
  • cinema tickets (if not full)
  • motorways (uncongested, tolls)
  • minor roads (with technology)
9
Q

What is the issue with Public Goods and the Free-rider Problem?

A
  • Free-rider: a person who receives the benefit of a good but does not pay for it
  • If good is non-excludable, people have incentive to ‘free-ride’ Why?:
  • Firms cannot prevent non-payers from consuming the good
  • The product is under produced, if produced at all
    … even though the value to society is greater than the cost of providing it
  • Market failure can be view as an externality
  • For example:
  • A fireworks display provides external benefits for non-buyers
  • Such external benefits are ignored in the supplier’s production decision
  • So, the fireworks display will be under-provided by the market
  • Solution: Government pays for the display, and recoups costs through taxation
10
Q

What does Public goods and positive consumption externality look like on the a graph?

A
  • With price on the y-axis and quantity on the x-axis
  • suppose we have two people - person 1 have a demand curve D{1} and person 2 who have a demand curve D{2} which is similar the D{1} but shifted up –> person two values the good more
  • if at each quantity we add together all the willingness to pay for each person we could create the MSB curve for both people for that good
  • the MSB curve is actually the equal to the MPB of the second person plus the positive externality benefit to person one
  • adding on the Supply curve of S=MC=MSC –> the optimal social level occurs at MSC=MSB
  • but if person 2 is the only one to buy the good they will only buy at a lower out put –> when there demand equal supply
  • therefore there is less provided by the market that what is socially desirable
  • the social welfare loss to society then occurs in the area above equilibrium up to the MSB line up to social efficiency
11
Q

Can the Government provide the efficient level of public and other non-excludable goods?

A

It may be difficult since Governments have limited information about:

  • marginal social cost (MSC) of government services
  • marginal social benefits (MSB) of government services

How does the government decide whether to spend public money?
1. Cost-benefit analysis: –> estimate the total benefits and total costs to society
such estimates are likely to have a large degree of error
2. May spend on projects that will win the most votes –> has nothing to do with MSB and MSC!

  • Efficient provision of public goods more difficult than that of private goods
  • Government failure: when a government does not set MSB = MSC
12
Q

What Causes the Tragedy of the Commons in the parable?

A
  • Social and private incentives differ
  • No incentive to reduce the size of its flock
  • Only a small part of the problem
  • The tragedy is due to an externality:
  • allowing one’s flock to graze on the common
    land reduces its quality for other families
  • People neglect this external cost, resulting in
    overuse of the land.
13
Q

What does the Tragedy of the Commons look like on a graph?

A
  • With price on the y-axis and number of sheep on the x-axis
  • with two downward sloping lines of Marginal Private Benefit (MPB) and marginal Social Benefit (MSB) to the left of it both originating from the same point
  • the issue is that the actual number of sheep is a lot larger than the Social optimum –> as the price of using the common is zero –> people pick the larger number of sheep which is the marginal private benefit level
14
Q

What does the modern day tragedy of the commons of fishing look like on a graph?

A
  • With price on the y-axis and number of boats on the x-axis
  • with a horizontal line of AC=MC
  • a negative gradient line of Average revenue = Marginal Private Benefit (MPB)
  • if there was free entry into the market and anyone can fish –> the quantity of fishing boats in the sea occur at AC=MC=AR=MPB
  • but if everyone came together and discuss what would be best for them –> they compare their MC and MR to maximise their profits
  • this creates the negative gradient curve of Marginal Revenue Product (MRP{B})= p x MPP{B}
  • at the point this line intercepts the MC=AC line is the collective optimum for boat owners that is alot lower than what the free market entry dictates –> not socially optimal as overfishing will occur
  • Also this is more than when MR= 0 where if another boat was added there is less efficiency —> dis economies of scale
  • tragedy can be reduced with quotas –> only allowed a certain number of boats to fish a certain number –> should bring you back closer to the optimal
15
Q

What is the importance of Property Rights?

A

= When Europeans discovered North America, there were 60 million buffalo Just over 200 years later: only 400 were left before buffalo became protected
- Elephants faces similar challenges in Africa

  • Cows have commercial value similar to like buffalo and elephants
  • But they do not face the threat of extinction. Why?
  • The cow is a private good, whereas buffalo and elephants are common resources
  • Two solutions to the Elephant problem:
  • Kenya, Tanzania, and Uganda: illegal to kill elephants
  • Botswana, Malawi, Namibia and Zimbabwe: legal to kill elephants on own property –> this has actually worked compared to making it illegal
  • Therefore, assigning property rights can solve the tragedy of the commons…