CHAPTER

11
Public Goods and Common
Resources
Goals Learn the defining characteristics of public goods and common
resources
in this chapter you will
Examine why private markets fail to provide public goods
Consider some of the important public goods in our economy
See why the costbenefit analysis of public goods is both
necessary and difficult
Examine why people tend to use common resources too much
Consider some of the important common resources in our
economy

Outcomes Classify goods into the categories of public goods, private goods,
common resources, or goods produced by a natural monopoly
after accomplishing
these goals, you Explain why production of public goods is unprofitable to private
should be able to industry
Explain the public good nature of national defense
Explain why surveys to determine the benefits of public goods are
a less precise valuation of benefits than prices of private goods
Tell the story of the Tragedy of the Commons

109
110 Chapter 11 Public Goods and Common Resources

Strive for a Five

Chapter 11 covers material that appears on the microeconomics exam under Section 4 of
the course expectations. Specifically, it covers:
Public goods
Private goods
How the government determines to provide public goods
Cost-benefit analysis

Key Terms
ExcludabilityThe property of a good whereby a person can be prevented from using
it
Rivalry in consumptionThe property of a good whereby one persons use diminishes
other peoples use
Private goodsGoods that are both excludable and rival in consumption
Public goodsGoods that are neither excludable nor rival in consumption
Common resourcesGoods that are rival in consumption but not excludable
Natural monopolyFirm that produces goods that are excludable but not rival in
consumption
Free riderA person who receives the benefit of a good but avoids paying for it
Cost-benefit analysisA study that compares the costs and benefits to society of
providing a public good
Tragedy of the CommonsA parable that illustrates why common resources get used
more than is desirable from the standpoint of society as a whole

Chapter Overview
Context and Purpose
Chapter 11 is the second chapter in a three-chapter sequence on the economics of the
public sector. Chapter 10 addressed externalities. Chapter 11 addresses public goods and
common resourcesgoods for which it is difficult to charge prices to users. Chapter 12
will address the tax system.
The purpose of Chapter 11 is to address a group of goods that are free to the consumer.
When goods are free, market forces that normally allocate resources are absent. Therefore,
free goods, such as playgrounds and public parks, may not be produced and consumed in
the proper amounts. Government can potentially remedy this market failure and improve
economic well-being.

Chapter Review
Introduction Some goods are free to the consumerbeaches, lakes, playgrounds. When
goods are available without prices, market forces that normally allocate resources are absent.
Therefore, free goods, such as playgrounds and public parks, may not be produced and
consumed in the proper amounts. Government can potentially remedy this market failure
and improve economic well-being.
The Different Kinds of Goods
There are two characteristics of goods that are useful when defining types of goods:
Excludability: the property of a good whereby a person can be prevented from using
it. A good is excludable if a seller can exclude nonpayers from using it (food in the
 Chapter 11 Public Goods and Common Resources 111

grocery store) and not excludable if a seller cannot exclude nonpayers from using it
(broadcast television or radio signal).
Rivalry in consumption: the property of a good whereby one persons use of a good
diminishes other peoples use. A good is rival in consumption if only one person can
consume the good (food) and not rival if the good can be consumed by more than
one at the same time (streetlight).
With these characteristics, goods can be divided into four categories:

1. Private goods: Goods that are both excludable and rival in consumption. Most goods
like bread and blue jeans are private goods and are allocated efficiently by supply and
demand in markets.

2. Public goods: Goods that are neither excludable nor rival in consumption, such as
national defense and streetlights.

3. Common resources: Goods that are rival in consumption but not excludable, such as
fish in the ocean.

4. Goods produced by a natural monopoly: Goods that are excludable but not rival in
consumption, such as fire protection and cable television. Natural monopolies will be
addressed in a later chapter.
This chapter examines the two types of goods that are not excludable and, thus, are free:
public goods and common resources.
Public Goods
Public goods are difficult for a private market to provide because of the free-rider problem. A
free rider is a person who receives the benefit of a good but avoids paying for it. Because
public goods are not excludable, firms cannot prevent nonpayers from consuming the
good, and thus, there is no incentive for a firm to produce a public good. The outcome of
a public good is similar to that of a positive externality because consumers of a good fail
to consume the efficient quantity of the good because they do not take into account the
benefit to others.
For example, a streetlight may be valued at $1,000 by each of ten homeowners in a
neighborhood. If the cost is $5,000, no individual will buy a streetlight because no one
can sell the right to use the light to their neighbors for $1,000 each. This is because after
the streetlight is in place, their neighbors can consume the light whether they pay or not.
Even though the neighborhood values the streetlight at a total value of $10,000 and the
cost of a streetlight is only $5,000, the private market will not be able to provide it. Public
goods are related to positive externalities in that each neighbor ignores the external benefit
provided to others when deciding whether to buy a streetlight. Often government steps in,
provides goods, such as streetlights, where benefits exceed the costs, and pays for them with
tax revenue. In this case, the government could provide the streetlight and tax each resident
$500 and everyone would be better off.
Some important public goods are national defense, basic research that produces general
knowledge, and programs to fight poverty.
Some goods can switch between being public goods and private goods depending on
the circumstances. A lighthouse is a public good if the owner cannot charge each ship as it
passes the light. A lighthouse becomes a private good if the owner can charge the port to
which the ships are traveling.
When a private market cannot produce a public good, governments must decide
whether to produce the good. Their decision tool is often costbenefit analysis: a study
that compares the costs and benefits to society of providing a public good. There are two
problems with costbenefit analysis:
Quantifying benefits is difficult using the results of a questionnaire.
Respondents have little incentive to tell the truth.
When governments decide whether to spend money on additional safety measures
such as stoplights and stop signs, they must consider the value of a human life because the
112 Chapter 11 Public Goods and Common Resources

benefit of such an expenditure is the probability of saving a life times the value of a life.
Studies suggest that the value of a human life is about $10 million.
Common Resources
Common resources are not excludable but are rival in consumption (say fish in the
ocean). Therefore, common resources are free, but when one person uses it, it diminishes
other peoples enjoyment of it. The outcome of a common resource is similar to that of a
negative externality because consumers of a good do not take into account the negative
impact on others from their consumption. The result is that common resources are used
excessively.
The Tragedy of the Commons is a parable that illustrates why common resources get
used more than is desirable from the standpoint of society as a whole. The town common
(open land to be grazed) will be overgrazed to the point where it becomes barren because,
since it is free, private incentives suggest that each individual should graze as many sheep as
possible, yet this is overgrazing from a social perspective. Possible solutions are to regulate
the number of sheep grazed, tax sheep, auction off sheep-grazing permits, or divide the
land and sell it to individual sheep herders, making grazing land a private good.
Some important common resources are clean air and water, congested nontoll roads,
and fish, whales, and other wildlife. Private decision makers use a common resource too
much, so governments regulate behavior or impose fees to reduce the problem of overuse.
Conclusion: The Importance of Property Rights
In the case of public goods and common resources, markets fail to allocate resources
efficiently because property rights are not clearly established. In a private market, no
one owns the clean air so no one can charge people when they pollute. The result is
that people pollute too much (externality example) or use too much clean air (common
resource example). Furthermore, no one can charge those who are protected by national
defense for the benefit they receive so people produce too little national defense (public
good example).
The government can potentially solve these problems by selling pollution permits,
regulating private behavior, or providing the public good.

Helpful Hints
1. In general, public goods are underproduced and common resources are overconsumed.
This is because they are both free. Because public goods are free, it is not profitable to
produce them (streetlights and national defense). Because common resources are free,
people overconsume them (clean air and fish in the ocean).

2. Public goods are defined by their characteristics, not by who provides them. A
streetlight is a public good because it is not excludable and not rival in consumption.
This is true even if, as an individual, I choose to buy one and put it in my front yard.
Once in my front yard, I cannot charge you for standing near it, and when you do,
it does not reduce my benefits from using it. Therefore, a streetlight is a public good
whether I buy it or the city government buys it. Further, if the city government sets
up a food stand and sells hot dogs, the hot dogs are private goods even though they
are provided by the government because the hot dogs are both excludable and rival in
consumption.

3. When governments use costbenefit analysis as a tool to help them decide whether to
produce a public good, we noted that it is difficult to collect data on the true benefits
that people would receive from a public good. This is because they have an incentive
to exaggerate their benefit if they would use the public good and underreport their
benefit if they dont plan to use the public good very much. This is sometimes called
the liars problem.
 Chapter 11 Public Goods and Common Resources 113

Self-Test
Multiple-Choice Questions
1. When a good is excludable,
a. one persons use of the good diminishes another persons ability to use it.
b. people can be prevented from using the good.
c. no more than one person can use the good at the same time.
d. everyone will be excluded from using the good.
e. it is a public good.

2. If one persons use of a good diminishes another persons enjoyment of it, the good is
a. rival in consumption.
b. excludable.
c. normal.
d. exhaustible.
e. non-rival in production.

3. If a road is congested, then use of that road by an additional person would lead to a(n)
a. negative externality.
b. positive externality.
c. moral hazard.
d. free-rider problem with rush hour drivers stuck in traffic.
e. adverse selection.

4. It is commonly argued that national defense is a public good. Nevertheless, the

weapons used by the U.S. military are produced by private firms. We can conclude that
a. resources would be used more efficiently if the government produced the
weapons.
b. resources would be used more efficiently if private firms provided national
defense.
c. weapons are rival in consumption and excludable, but national defense is not rival
in consumption and not excludable.
d. national defense is rival in consumption and excludable, but weapons are not rival
in consumption and not excludable.
e. weapons are not rival in consumption and not excludable, but national defense is
rival in consumption and excludable.

5. The Tragedy of the Commons results when a good is

a. rival in consumption and not excludable.
b. excludable and not rival in consumption.
c. both rival in consumption and excludable.
d. neither rival in consumption nor excludable.
e. rival in production and not rival in consumption.

6. The Tragedy of the Commons

a. occurs most often with public goods.
b. is only applicable to shared grazing rights among sheepherders.
c. is eliminated when property rights are assigned to individuals.
d. occurs when social incentives are in line with private incentives.
e. is more common with private goods than public goods.
114 Chapter 11 Public Goods and Common Resources

7. What causes the Tragedy of the Commons?

(i) Social and private incentives differ.
(ii) Common resources are not rival in consumption and are not excludable.
(iii) Common resources are not excludable but are rival in consumption.
a. (i) only
b. (ii) only
c. (iii) only
d. (i) and (ii) only
e. (i) and (iii) only

8. Why do elephants face the threat of extinction but cows do not?

a. Cattle are a valuable source of income for many people, whereas elephants have
no market value.
b. There is a high demand for products that come from cows, whereas there is no
demand for products that come from elephants.
c. There are still lots of cattle that roam free, whereas all elephants live in zoos.
d. Cattle are owned by ranchers, whereas elephants are owned by no one.
e. Cattle are a food source and elephants are not.

9. Reggie, Rachael, and Rudy all enjoy looking at flowers blooming in gardens in their
neighborhood. The neighborhood association is considering planting a flower garden
around the sign at the entrance to the neighborhood. Reggie values the garden at $20,
Rachael at $35, and Rudy at $50. The flowers and labor for the garden cost $85. What
should the neighborhood association do?
a. Plant the garden because people like flowers.
b. Plant the garden because the benefits outweigh the costs.
c. Do not plant the garden because the costs outweigh the benefits.
d. Do not plant the garden in order to prevent the Tragedy of the Commons
problem of overuse.
e. Do not plant the garden because flowers are not considered a public good.

Table 11-1
Consider a small town with only three families, the Jones family, the Harris family, and the
Wong family. The town does not currently have any streetlights, so it is very dark at night.
The three families are considering putting in streetlights on Main Street and are trying to
determine how many lights to install. The following table shows each familys willingness
to pay for each streetlight.
Number of The Jones The Harris The Wong
Streetlights Family Family Family
1 $180 $250 $220

2 140 200 210

3 90 140 180

4 30 70 130

5 0 35 60

6 0 0 20

10. Refer to Table 11-1. Suppose the cost to install each streetlight is $400. How many
streetlights should the town install to maximize total surplus from the streetlights?
a. one streetlight
b. two streetlights
c. three streetlights
d. four streetlights
e. five streetlights
 Chapter 11 Public Goods and Common Resources 115

11. The government provides public goods because

a. private markets are incapable of producing these types of goods.
b. free-riders make it difficult for private markets to supply the socially optimal
quantity.
c. markets are always better off with some government oversight.
d. external benefits will accrue to private producers.
e. production costs are lower when goods are produced by the government.

12. Because of the free-rider problem,

a. private markets tend to undersupply public goods.
b. the federal government spends too many resources on national defense and not
enough resources on medical research.
c. fireworks displays have become increasingly dangerous.
d. poverty has increased.
e. private markets tend to oversupply public goods.

Free Response Questions

1. Place each of the following in the correct location in the table.
Rival?
Yes No
Private Goods Natural Monopolies

Yes

Common Resources Public Goods

Excludable?

No

a. Congested toll roads

b. Knowledge
c. Fish in the ocean
d. National defense
e. Congested non-toll roads
f. Cable TV
g. The environment
h. Fire protection
i. Ice-cream cones
j. Non-congested toll roads
k. Clothing
l. Non-congested non-toll roads

2. Why do wild salmon populations face the threat of extinction but goldfish
populations are in no such danger?
116 Chapter 11 Public Goods and Common Resources

Solutions
Multiple-Choice Questions
1. b TOP: Excludability
2. a TOP: Rivalry in consumption
3. a TOP: Rivalry in consumption
4. c TOP: Public goods
5. a TOP: Tragedy of the Commons
6. c TOP: Tragedy of the Commons
7. e TOP: Tragedy of the Commons
8. d TOP: Common resources
9. b TOP: Cost-benefit analysis
10. c TOP: Public goods
11. b TOP: Public goods
12. a TOP: Free riders
Free Response Questions
1.
Rival?
Yes No
Private Goods Natural Monopolies
Ice-cream cones Fire protection
Clothing Cable TV
Yes Congested toll Non-congested
roads toll roads

Common Resources Public Goods

Excludable? Fish in the ocean National defense
The environment Knowledge
Congested non- Non-congested
No toll roads non-toll roads

TOP: Excludability / Rivalry in consumption

2. No one owns the wild salmon, whereas private individuals own goldfish. The profit motive leads to different
allocations of the resources. Salmon fishers have an individual incentive to catch as many salmon as possible
before someone else does. Pet shop owners have a profit incentive to breed goldfish to sell to consumers.
TOP: Common resources