Chapter

11
Public Goods
and Common
Resources

A
n old song lyric maintains that “the best things in life are free.” A moment’s
thought reveals a long list of goods that the songwriter could have had in
mind. Nature provides some of them, such as rivers, mountains, beaches,
lakes, and oceans. The government provides others, such as playgrounds, parks,
and parades. In each case, people do not pay a fee when they choose to enjoy the
benefit of the good.
Goods without prices provide a special challenge for economic analysis. Most
goods in our economy are allocated in markets, in which buyers pay for what they
receive and sellers are paid for what they provide. For these goods, prices
are the signals that guide the decisions of buyers and sellers, and these deci-
sions lead to an efficient allocation of resources. When goods are available
free of charge, however, the market forces that normally allocate resources
in our economy are absent.

215

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216 Part IV The Economics of the Public Sector

In this chapter, we examine the problems that arise for the allocation of
r­ esources when there are goods without market prices. Our analysis will shed
light on one of the Ten Principles of Economics in Chapter 1: Governments can some-
times improve market outcomes. When a good does not have a price attached
to it, private markets cannot ensure that the good is produced and consumed in
the proper amounts. In such cases, government policy can potentially remedy the
market failure and increase economic well-being.

11-1 The Different Kinds of Goods

How well do markets work in providing the goods that people want? The ­answer
to this question depends on the good being considered. As we discussed in
­Chapter 7, a market can provide the efficient number of ice-cream cones: The price
of ice-cream cones adjusts to balance supply and demand, and this equilibrium
maximizes the sum of producer and consumer surplus. Yet as we discussed in
Chapter 10, the market cannot be counted on to prevent aluminum manufacturers
from polluting the air we breathe: Buyers and sellers in a market typically do not
take into account the external effects of their decisions. Thus, markets work well
when the good is ice cream, but they work badly when the good is clean air.
In thinking about the various goods in the economy, it is useful to group them
according to two characteristics:
excludability • Is the good excludable? That is, can people be prevented from using the good?
the property of a good • Is the good rival in consumption? That is, does one person’s use of the good
whereby a person can be reduce another person’s ability to use it?
prevented from using it
Using these two characteristics, Figure 1 divides goods into four categories:
rivalry in consumption
the property of a good 1. Private goods are both excludable and rival in consumption. Consider an
whereby one person’s ice-cream cone, for example. An ice-cream cone is excludable because it is
use diminishes other possible to prevent someone from eating one—you just don’t give it to her.
people’s use An ice-cream cone is rival in consumption because if one person eats an
ice-cream cone, another person cannot eat the same cone. Most goods in the
private goods economy are private goods like ice-cream cones: You don’t get one unless
goods that are both you pay for it, and once you have it, you are the only person who benefits.
excludable and rival in When we analyzed supply and demand in Chapters 4–6 and the ­efficiency
consumption of markets in Chapters 7–9, we implicitly assumed that goods were both
excludable and rival in consumption.
public goods 2. Public goods are neither excludable nor rival in consumption. That is, people
goods that are neither cannot be prevented from using a public good, and one person’s use of a
excludable nor rival in public good does not reduce another person’s ability to use it. For example,
consumption a tornado siren in a small town is a public good. Once the siren sounds, it is
impossible to prevent any single person from hearing it (so it is not exclud-
able). Moreover, when one person gets the benefit of the warning, she does
not reduce the benefit to anyone else (so it is not rival in consumption).
common resources 3. Common resources are rival in consumption but not excludable. For ex-
goods that are rival in ample, fish in the ocean are rival in consumption: When one person catches
consumption but not fish, there are fewer fish for the next person to catch. Yet these fish are not an
excludable excludable good because, given the vast size of an ocean, it is difficult to stop
fishermen from taking fish out of it.

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 CHAPTER 11 PUBLIC GOODS AND COMMON RESOURCES 217

Rival in consumption? FIGURE 1

Yes No
Four Types of Goods
Private Goods Club Goods Goods can be grouped into
four categories according to two
Yes • Ice-cream cones • Fire protection characteristics: (1) A good
• Clothing • Cable TV is excludable if people can
• Congested toll roads • Uncongested toll roads be ­prevented from using it.
Excludable? (2) A good is rival in consump-
Common Resources Public Goods tion if one person’s use of the
good diminishes other people’s
No • Fish in the ocean • Tornado siren use of it. This diagram gives
• The environment • National defense examples of goods in each
• C
 ongested nontoll roads • Uncongested nontoll roads category.

4. Club goods are excludable but not rival in consumption. For instance, club goods
­consider fire protection in a small town. It is easy to exclude someone from goods that are excludable
using this good: The fire department can just let her house burn down. Yet but not rival in
fire protection is not rival in consumption: Once a town has paid for the consumption
fire department, the additional cost of protecting one more house is small.
(We discuss club goods again in Chapter 15, where we see that they are one
type of a natural monopoly.)

Although Figure 1 offers a clean separation of goods into four categories,

the boundaries between the categories are sometimes fuzzy. Whether goods
are excludable or rival in consumption is often a matter of degree. Fish in an
ocean may not be excludable because monitoring fishing is so difficult, but a
large enough coast guard could make fish at least partly excludable. Similarly,
although fish are generally rival in consumption, this would be less true if the
population of fishermen were small relative to the population of fish. (Think
of North American fishing waters before the arrival of European settlers.) For
­purposes of our analysis, however, it will be helpful to group goods into these
four categories.
In this chapter, we examine goods that are not excludable: public goods and
common resources. Because people cannot be prevented from using these goods,
they are available to everyone free of charge. The study of public goods and com-
mon resources is closely related to the study of externalities. For both of these
types of goods, externalities arise because something of value has no price
­attached to it. If one person were to provide a public good, such as a tornado
siren, other people would be better off. They would receive a benefit without
paying for it—a positive externality. Similarly, when one person uses a common
­resource such as the fish in the ocean, other people are worse off because there are
fewer fish to catch. They suffer a loss but are not compensated for it—a negative
externality. Because of these external effects, private decisions about consumption
and production can lead to an inefficient allocation of resources, and government
­intervention can potentially raise economic well-being.

Quick Quiz Define public goods and common resources and give an example of each.

Copyright 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.