Public Goods and Common

Property Resources

Chapter 11

Criteria Used To ClassifyDifferent Kinds of Goods

• Excludability• Property of a good• A person can be prevented from using it

• Rivalry in consumption• Property of a good• One person’s use diminishes other people’s use

2

Four types of goods

1

3

Rival in consumption?

Yes No

Excludable?

Yes

Private goods

- Ice-cream cones - Clothing - Congested toll roads

Natural monopolies

- Fire protection - Cable TV - Uncongested toll roads

No

Common resources

- Fish in the ocean - The environment - Congested nontoll roads

Public goods

- Tornado system - National defense - Uncongested nontoll roads

Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one person’s use of the good diminishes other

people’s use of it. This diagram gives examples of goods in each category.

Different Kinds of Goods

• Types of goods• Private goods

• Excludable & Rival in consumption• Public goods

• Not excludable & Not rival in consumption• Common resources

• Rival in consumption & Not excludable • Natural monopoly

• Excludable & Not rival in consumption

4

Chpt. 11: Public Goods and Common Property Resources

• Public goods & Common resources• Not excludable• People cannot be prevented from using them• No price attached to it• Positive externalities (external benefits)• Negative externalities (external costs)

5

Common Resources

• Some important common resources– Clean air and water– Congested roads– Fish, whales, and other wildlife

6

• Species of animals– Commercial value - threatened with extinction

• Buffalo – North America– Hunting - 19th century

• Elephants– African countries– Hunting – today

• The cow– Commercial value– Species - continue to thrive

Why the cow is not extinct

7

• Elephant - common resource– No owners– Poachers - numerous

• Strong incentive to kill them• Slight incentive to preserve them

• Cows - private good– Ranches - privately owned– Ranchers

• Great effort to maintain the cattle population on his ranch• Reaps the benefit

Why the cow is not extinct

8

• Government intervention – help elephant population– Kenya, Tanzania, and Uganda

• Illegal to kill elephants; Illegal to sell ivory• Hard to enforce• Elephant population – still diminishing

– Botswana, Malawi, Namibia, and Zimbabwe• Elephants – private good• Allow people to kill elephants

– Only those on their own property

• Landowners - incentive to preserve elephants • Elephant population – started to rise

Why the cow is not extinct

9

Tradable PermitsA Property Rights Approach

• “Common” Property Problem– No one “owns” the air/water; therefore no one benefits from

managing (pricing) its usage• Solution is to assign the property right to one party and

allow them to trade its use in the marketplace– Coase Theorem

Coase’s Theorem

• If property rights exist and transaction (bargaining) and information costs are low– Then parties will be able to bargain among themselves (without

government intervention) to obtain an efficient outcome

An Example of the Coase Theorem

• Marketplace– Firm upstream from a farmer

• Firm produce a good valued by consumer but dumps pollutants into the river as a byproduct

• Cost of using the river to the firm is $0 – Cost of pollution abatement equipment $3M

– Farmer• Downstream from the firm• Uses water to irrigate his agricultural products• Pollution affects/degrades his product

– Crop damage estimate to be $8M

Assigning the Property Rights

• If assigned to the firm– Farmer is willing to “bribe” the firm to reduce pollution

• Willing to pay firm to reduce gallons discharged up to marginal value of crop damage due to pollution

• Firm: willing to accept payments that are >= marg costs of treatment/reduction

– Farmer WTP ~ $8m• Buy equipment for ~$3m

Growth rate (replacement) and size of the fish stock/pool

• Too Small/Low Stock Size– Lower growth rate as fish can’t hook up and reproduce– Birth (replacement) less than death/harvest

• Growth rate declines; species becomes extinct

• Too Large Stock Size– Food sources (plankton, biomass, other fish) too small to

support large # of fish• Growth rate declines

Schaffer model: Relationship between the Fish Population and Growth

3 Possible Solutions

• 1. Open (unregulated) Fisheries (Ec)– Catch until total costs exceed revenues (up to zero profits) =>

ATC(Q) = TotRev(Q) = P*Q• 2. Maximum Sustainable Yield(MSY) (Em)

– Largest “harvest” that can be sustained every year (harvest = replacement rate)

– Biologist solution• 3. Economically Efficient (Eo)

– Maximize Economic Value (MC(Q) = MR(Q)

How do we use this to manage the fisheries (prevent extinction)

• Compare– Open Access Fishery (Tragedy of the Commons)

• Everyone who has a boat can harvest as many fish as they can catch profitably

– Maximum Sustainable Yield (MSY)• What is the largest stock of fish that can be sustained from one year to

the next (harvest = growth rate at max stock size)

– Economically Efficient• Given costs/benefits – what is the efficient harvest

FIGURE 14.2 Efficient Sustainable Yield for a Fishery

Policy Options• Command and Control (Regulation)

– Set Quota for number of fish that can be caught• Ignores differences in costs/efficiency of fishermen• Can lead to over capacity (too many boats, too big)• Discarded catch/by-catch issues

• Tradable permits (ITQs)– Determine optimal “harvest” and number of licenses to be issued– Divide quota/target by number of license = #fish caught per license– Auction or grandfather licenses– Allow owners to trade (one-year, or multi-year)– Multi-species/by-catch

• Taxes– Per unit tax on the #fish caught

Individual Transferable Quotas (ITQs)• An efficient quota system will have the following

characteristics:– The quotas entitle the holder to catch a specified volume of a

specified type of fish.– The total amount of fish authorized by the quotas should be

equal to the efficient catch level for that fishery. – The quotas should be freely transferable among fishermen.

• Taxes also raise the real cost of fishing, but do so in an efficient manner.– Unlike regulations, the tax can lead to the static-efficient

sustainable yield allocation because the tax revenues represent transfer costs and not real-resource costs.

– Transfer costs involve the transfer of resources from one part of society to another.

– For the individual fisherman, however, a tax still represents an increase in costs.

FIGURE 14.7 Effect of Regulation

TABLE 14.1 Countries with Individual Transferable Quota Systems