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Understanding Public Goods in Economics
Dive into the world of public goods! Discover their unique characteristics, economic importance, and how they differ from common resources. Enhance your economics knowledge with clear explanations and real-world examples.

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Now Playing:Public goods – Example 0a
Intros
  1. Public Goods Overview
  2. Public Goods Overview
    Classifying Goods
    • Excludable
    • Non-Excludable
    • Rival
    • Non-Rival
  3. Public Goods Overview
    Distinguishing Types of Goods
    • Private Goods
    • Public Goods
    • Common Resources
    • Natural Monopoly Goods
    • Examples of these Types of Goods
Externalities
Jump to:NotesConceptFAQsPrerequisites
Notes
Classifying Goods

How goods and services differ from one another depends on how they are classified.
  1. Excludable: A good is excludable if only people who pay for the good gets to enjoy the good’s benefits.

    Example: Going to a concert

  2. Non-Excludable: A good is non-excludable if you cannot prevent anyone from benefiting from the good.
    Example: Public park

  3. Rival: A good is rival if a person’s use of the good decreases the quantity available for others.

    Example: A chocolate bar can only be consumed once

  4. Non-Rival: a good is non-rival if a person’s use of the good does not decrease the quantity available for others.
    Example: Watching movies on Netflix

Distinguishing Types of Goods
  1. Private Goods: a good that is both excludable and rival. People pay for the good, and using it decreases the quantity for others.
    Example: A hot dog

  2. Public Goods: a good that is both non-excludable and non-rival. You cannot prevent anyone from benefiting from the good and using it does not decrease the quantity for others.

    Example: Police

  3. Common Resources: a good that is non-excludable and rival. You cannot prevent anyone from using the good and using the good decreases the quantity for others.

    Example: Ocean fish

  4. Natural Monopoly Goods: a good that is excludable and non-rival. People pay for the good and using it does not decrease the quantity for others.

    Example: Cell phone, Internet

Public Goods Distinguishing Types of Goods Private Goods Public Goods Common Resources Natural Monopoly Goods

The Free-Rider Problem

Marginal Social Benefit of a Public Good: Is the sum of every individual’s marginal social benefit of all individuals.

The Free-Rider Problem Marginal Social Benefit of a Public Good

The Free-Rider Problem Marginal Social Benefit of a Public Good


Note: This curve behaves the same as the MSB of a private good.

A “free rider” is a person that enjoys the benefits of a good without having to pay for it. Since non-excludable goods benefits everyone (including people who don’t pay), everyone has an incentive to free ride.

Public goods have a free-rider problem. Since very little people want to pay for the good, quantities become less, causing the inequality MSB > MSC.

inefficient quantity of the public good, which creates a deadweight loss

This leads to an inefficient quantity of the public good, which creates a deadweight loss

Note: Efficient quantity of a public good is only achieved if MSB = MSC.

Solving the Free Riders Problem: If firms try to sell public goods, then no one will buy it because there is no incentive to. However, the government can tax all the consumers of the public good, which forces everyone to pay for its provision.

Tragedy of the Commons

Tragedy of the commons happens when there is no incentive to prevent the overuse of common resources.

Most common resources are renewable and can rejuvenate themselves. However, common resources can be used sustainably, or unsustainably.
  1. If it is used sustainably, then the rate of use is ≤ \leq rate of growth. This means the total stock of the common resource grows or remains constant.

  2. If it is used unsustainably, then the rate of use > rate of growth. This means the total stock of the common resources decreases.


In the graph, we see that
  1. In the beginning, as the stock of fishes increases, the sustainable catch increases.

  2. After the maximum sustainable catch, as the stock of fishes increase, the sustainable catch decreases. This is because fishes must compete for food, so some die and there are less fishes to catch.

Tragedy of the Commons sustainably unsustainably

In the graph, we see that
  1. If we fish on or under the sustainable catch curve, then it is sustainable.

  2. If we fish above the sustainable catch curve, then it is unsustainable


Tragedy of the Commons sustainably unsustainably

Why do firms overfish? This is because they do not realize the external costs that come with fishing.

Tragedy of the Commons sustainably unsustainably

We know that the social optimal output is when MSB = MSC, which is at the maximum sustainable catch.

The firm’s supply curve is MPC, and the demand curve is MSB. So the market equilibrium is the intersection of the two and the quantity is past the maximum sustainable catch. This is inefficient, so we get deadweight loss from overfishing.
Concept

Introduction to Public Goods

Welcome to our exploration of public goods, a fascinating concept in economics! Public goods are unique resources that benefit everyone in society, regardless of who pays for them. Think of streetlights, national defense, or clean air these are all examples of public goods. They're non-excludable (you can't prevent people from using them) and non-rivalrous (one person's use doesn't diminish another's). Our introduction video is a great starting point to grasp this concept. It breaks down the characteristics of public goods and their importance in our economy. Understanding public goods is crucial because they often require government intervention to be provided efficiently. This knowledge helps us make sense of many economic policies and societal decisions. As we delve deeper into this topic, you'll see how public goods shape our daily lives and influence economic thinking. Ready to dive in? Let's watch the video and uncover the world of public goods together!

FAQs

Here are some frequently asked questions about public goods and common resources:

  1. What are at least 5 examples of public goods?

    Five examples of public goods are: national defense, street lighting, clean air, public parks, and basic scientific research. These goods are non-excludable and non-rivalrous, meaning everyone can benefit from them without reducing their availability to others.

  2. What are the 4 categories of public goods?

    The four categories of goods are: private goods (excludable and rivalrous), public goods (non-excludable and non-rivalrous), common resources (non-excludable but rivalrous), and club goods (excludable but non-rivalrous).

  3. What is the difference between public goods and common resources?

    Public goods are both non-excludable and non-rivalrous, while common resources are non-excludable but rivalrous. This means that for common resources, one person's use reduces the availability for others, which is not the case for public goods.

  4. What are examples of common resources?

    Examples of common resources include fishing grounds, grazing pastures, forests, and clean water sources. These resources are accessible to all but can be depleted if overused.

  5. How does the government address the provision of public goods?

    Governments typically provide public goods through taxation and public spending. They may also implement regulations to manage common resources, create incentives for private provision of certain goods, or use a combination of these approaches to ensure adequate provision and prevent the free-rider problem.

Prerequisites

Understanding public goods is a crucial concept in economics and public policy. While there are no specific prerequisite topics listed for this subject, it's important to recognize that a solid foundation in basic economic principles can greatly enhance your comprehension of public goods. Concepts such as supply and demand, market structures, and resource allocation provide a valuable context for exploring the unique characteristics of public goods.

Public goods are a fascinating area of study that intersects with various economic and social concepts. These goods are characterized by two main features: non-excludability and non-rivalry in consumption. To fully grasp these properties, it's beneficial to have a basic understanding of how markets typically function and why public goods present a unique challenge to traditional market mechanisms.

While not direct prerequisites, familiarity with topics such as externalities, market failure, and government intervention in the economy can provide valuable insights into the nature and importance of public goods. These related concepts help illustrate why public goods often require collective action or government provision to ensure their adequate supply.

Additionally, a basic understanding of game theory can be helpful when exploring the challenges associated with public goods, particularly the free-rider problem. This issue arises because individuals may have an incentive to benefit from public goods without contributing to their provision, leading to potential undersupply in a free market system.

Although there are no specific prerequisites listed, developing a broad understanding of economic principles and social dynamics can significantly enhance your ability to analyze and discuss public goods effectively. This holistic approach allows you to appreciate the complexities involved in providing and managing public goods, as well as their impact on society and economic efficiency.

As you delve into the study of public goods, you'll find that this topic connects with various other areas of economics and public policy. It touches on issues of collective action, social welfare, and the role of government in addressing market failures. By approaching the subject with a well-rounded economic perspective, you'll be better equipped to engage with the nuanced debates surrounding public goods and their provision in modern societies.

In conclusion, while there may not be strict prerequisites for studying public goods, a solid grounding in fundamental economic concepts will undoubtedly enrich your understanding of this important topic. As you explore public goods, you'll likely find yourself drawing connections to various economic principles and social theories, highlighting the interconnected nature of economic study and its relevance to real-world policy decisions.