The Different Kinds of Goods-criteriaGoods can be divided in respect to various criteria. Of them, the most important criteria in this chapter are rivalry in consumption and excludability

o Rivalry in consumptionis the property of a good whereby one person’s use diminishes other people’s useThus, such goods have limited amounts at a time

o Excludabilityis the property of a good whereby a person can be prevented from using itIn normal circumstances, this means that one must pay for the use of such good

The Different Kinds of GoodsThere are four kinds of good according to the abovementioned criteria

o Private Goods are most common, and are the primary subject to much economic analysis. Even in Chapters 4 to 9, we implicitly assumed that the goods in subject were private goods

o Club goods do not have rivalry in consumption. Thus, its quantity is not limited, but one must pay for the use of it. Many software or digital products are considered as club goods.

o Common Resources and Public Goods are not excludable. One does not need to pay for these kinds of products. These are the primary concerns of this chapter. Because people cannot be charged for the use of these goods, they are subject to externalities and thus market failures. This is when government intervention comes in handy

Public Goods => The Free Rider Problemo Free rider: a person who receives the benefit

of a good but does not have to pay for ito The benefit of the society may exceed the

cost,but as no one ‘has’ to pay for it, the money isn’t collected

o Socially desirable things aren’t produced because they are not profitable

o Government intervention: tax the public and use the revenue to provide the good

o => make everyone better off Public goods - Examples

o National Defense: one of the most fundamental needs to have a government

o Basic Research: different from patent-able technology, that it goes into a pool of basic knowledge

Public goods – Cost-benefit analysiso Must be conducted by the government to

spend the taxes to appropriate placeso Difficulties arise because quantifying the

results is hardo Without the price signals to observe the

benefits & cost

Common Resources – The Tragedy of the Commonso Collective ownership depletes the limited

resourceo Because social and private incentives differo Private incentives to decrease consumption

of common goods are small because the minority is only a small part of the whole

o => negative externality Common Resources – solutions

o Regulate allotmento Internalize the externality e.g. taxo Auction off resourceso Turn into private goods e.g. enclosure

movement Common Resources – examples

o Clean environment => pollutiono Congested roads @ rush houro Wildlife

Market failures: unstable property rightso No one is in responsibility for the

management of ito Creates externalities

Market failures: solutions by government interventiono Define property rights e.g. pollution permits

CHAPTER XI PUBLIC GOODS AND 131016

Antonio Fowl Stark

김강산

o Regulate private behavior e.g. hunting permits

o Utilize tax revenue