N.

GREGORY MANKIW NINTH EDITION

PRINCIPLES OF
ECONOMICS
CHAPTER
Public Goods and
11 Common Resources
Interactive PowerPoint Slides by:
V. Andreea Chiritescu
Eastern Illinois University
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 1
 IN THIS CHAPTER
• What are public goods?
• What are common resources?
• Give examples of each.
• Why do markets generally fail to provide the
efficient amounts of these goods?
• How might the government improve market
outcomes in the case of public goods or
common resources?

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
2
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Introduction
• We consume many goods without paying:
– Parks, national defense, clean air and
water
– When goods have no prices, the market
forces that normally allocate resources are
absent
– The private market may fail to provide the
socially efficient quantity of such goods
• “Governments can sometimes improve
market outcomes.”
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 3
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Characteristics of Goods
• Excludability
– People can be prevented from using a good
– Excludable: fish in a private pond; tacos
– Not excludable: fish in the ocean; a highway
• Rivalry in consumption
– One person’s use of a unit of a good reduces
another person’s ability to use it
– Rival: fish tacos; congested road
– Not rival: uncongested road

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 4
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Different Kinds of Goods
• Private goods
– Excludable & Rival in consumption (pizza)
• Public goods
– Not excludable & Not rival in consumption
(national defense)
• Common resources
– Not excludable & Rival in consumption (deer in
the forest)
• Club goods
– Excludable & Not rival in consumption (cable TV)
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 5
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 EXAMPLE 1: Different kinds of goods
1. Fish in private pond: 1. rival, excludable:
private good
2. Fish in the ocean: 2. rival, not excludable:
common resource
3. Specific research on a 3. not rival, excludable:
cholesterol-lowering club good
drug for which a
patent can be
obtained:
4. Basic research on 4. not rival, not
lifestyle and excludable: public
cholesterol levels: good
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
6
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Active Learning 1: Categorizing roads

• A road is which of the four kinds of

goods?

• Hint: The answer depends on whether the road is

congested or not, and whether it’s a toll road or
not. Consider the different cases.

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
7
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Active Learning 1: Answers
• Rival in consumption? Only if congested.
• Excludable? Only if a toll road.

Four possibilities:
• Uncongested non-toll road: public good
• Uncongested toll road: club good
• Congested non-toll road: common resource
• Congested toll road: private good

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
8
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 ASK THE EXPERTS
Congestion Pricing
“In general, using more congestion charges in crowded
transportation networks — such as higher tolls during
peak travel times in cities, and peak fees for airplane
takeoff and landing slots — and using the proceeds to
lower other taxes would make citizens on average better
off.”

Source: IGM Economic Experts Panel, January 11, 2012.

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
9
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Not Excludable Goods
• Public goods and common resources
– People cannot be prevented from using
these goods, they are available to
everyone free of charge
– For both, externalities arise because
something of value has no price attached
to it
• Private decisions about consumption and
production can lead to an inefficient outcome

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 10
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Public Goods and Free Riders
• Free rider
– Person who receives the benefit of a good
but avoids paying for it
• The free-rider problem
– Public goods are not excludable, so
people have an incentive to be free riders
– Prevents the private market from
supplying the goods
– Market failure
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 11
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Active Learning 2: Let’s build a fountain!
You and your neighbors (about 100 people) would
love to have a water fountain in the neighborhood
park. Each of you values having the fountain at $10.
The neighborhood association finds a construction
firm that will build the fountain for $7,000. A hat is
passed around for the contributions, but once the
money is counted, there are only $3,000 collected.
A. Should the fountain be build?
B. What happened? Will the fountain be built?
C. Can the government help build the fountain?
How?

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
12
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Active Learning 2: Answers
A. Should the fountain be build?
– YES, because the benefit ($10,000) exceeds
the cost ($7,000)
B. What happened? Will the fountain be built?
– The free-rider problem: some didn’t contribute
because they can still enjoy the fountain if built.
– Because only $3,000 were collected, the
fountain cannot be build
C. Can the government help? How?
– The government can tax every neighbor $7 and
then use the money to build the fountain.
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
13
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Public Goods
• Government can remedy the free-rider
problem
– If total benefits of a public good exceeds
its costs
– Provide the public good
– Pay for it with tax revenue
– Make everyone better off
– Problem: Measuring the benefit is usually
difficult
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 14
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Some important public goods – 1
• National defense
– Very expensive public good: $744 billion, 2017
– Everybody agrees national defense is a public
good the government should provide
• Basic research: general knowledge
– Subsidized by government
– Difficulties: hard to measure the benefits and
decisions are made by members of Congress,
not scientists

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
15
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Some important public goods – 2
• Fighting poverty
– Welfare system (Temporary Assistance for
Needy Families program, TANF)
• Provides a small income for some poor
families
– Food stamps (Supplemental Nutrition
Assistance Program, SNAP)
• Subsidize the purchase of food for those with
low incomes
– Government housing programs
• Make shelter more affordable
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
16
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Difficult Job of Cost–Benefit Analysis
• The government
– Provides public goods because the private
market on its own will not produce an
efficient quantity
– Must determine what kinds of public
goods to provide
– Must determine what quantity of the public
good to provide

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 17
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Cost–Benefit Analysis
• Cost–benefit analysis
– Study that compares the costs and
benefits to society of providing a public
good
– Estimate the total costs and benefits of the
project to society as a whole
– There are no price signals to observe
– Estimating costs and benefits of public
projects are rough approximations at best

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 18
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Common Resources
• Common resources are not excludable
– Cannot prevent free riders from using
– Little incentive for firms to provide
– Role for government: seeing that they are
provided
• Common resources are rival in consumption
– Each person’s use reduces others’ ability to
use
– Role for government: ensuring they are not
overused
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 19
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Tragedy of the Commons – 1
• The tragedy of the commons
– Parable that shows why common resources are
used more than desirable
• Medieval town where sheep graze on
common land
– As the population grows, the number of sheep
grows
– The amount of land is fixed, the grass begins to
disappear from overgrazing
– With no grass left, raising sheep is impossible
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 20
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Tragedy of the Commons – 2
• Social and private incentives differ
– The private incentives (using the land for
free) outweigh the social incentives (using it
carefully)
• The tragedy arises because of a negative
externality
– Allowing one’s flock to graze on the common
land reduces its quality for other families
– People neglect this external cost, resulting in
overuse of the land
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 21
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Tragedy of the Commons – 3
• Possible solutions:
– Regulate the number of sheep per family
– Internalized the externality by taxing
sheep
– Auction off a limited number of sheep-
grazing permits
– Make land private property: divide the land
among town families

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 22
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Some important common resources – 1

• Clean air and water

– Negative externality: pollution
– Regulations or corrective taxes
• Congested roads
– Negative externality: congestion
– Corrective tax: charge drivers a toll; or
increase tolls during rush hour
– Tax on gasoline: but is also discourages
driving on uncongested roads
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
23
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Some important common resources – 2

• Fish, whales, and other wildlife

– Oceans: least regulated common resource
• Needs international cooperation
• Difficult to enforce an agreement
– Fishing and hunting licenses
– Limits on fishing and hunting seasons
– Limits on size of fish
– Limits on quantity of animals killed

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
24
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Active Learning 3: Social media
Facebook, Twitter, YouTube, and so on are
examples of social media that most of us use.
A. How is social media a common resource?
B. In your use of social media, have you had
to deal with undesirable behavior of
others? Is this an externality?
C. Do you think the providers of social media
forums should regulate the behavior of
users? If not, why not? If so, how?

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
25
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Importance of Property Rights
• Market fails to allocate resources efficiently
– Because property rights are not well established
– Some item of value does not have an owner
with the legal authority to control it
• Government can potentially solve it
– Help define property rights and thereby unleash
market forces
– Regulate private behavior
– Use tax revenue to supply a good that the
market fails to supply
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a 26
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 THINK-PAIR-SHARE
While watching a nature documentary, you find
that Kenya, Tanzania, and Uganda have made it
illegal to kill elephants and sell their ivory. But
countries like Botswana, Malawi, Namibia, and
Zimbabwe allow people to kill elephants, but only
those on their own property. Let’s talk about elephants
and chickens:
A. How is an elephant like a chicken? Different?
B. Which are going extinct: elephants of chickens?
C. How is it possible to turn an elephant into a
chicken?
D. Where is the elephant population is increasing?
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
27
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 CHAPTER IN A NUTSHELL
• Goods differ in whether they are excludable
and whether they are rival in consumption.
– A good is excludable if it is possible to prevent
someone from using it.
– A good is rival in consumption if one person’s
use of the good reduces others’ ability to use
the same unit of the good.
– Markets work best for private goods, which are
both excludable and rival in consumption.
– Markets do not work as well for other types of
goods.
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
28
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 CHAPTER IN A NUTSHELL
• Public goods are neither rival in consumption nor
excludable.
– Examples of public goods include fireworks
displays, national defense, and the discovery of
fundamental knowledge.
– Because people are not charged for their use of
the public good, they have an incentive to free
ride, making private provision of the good
untenable.
– Therefore, governments provide public goods,
basing their decision about the quantity of each
good on cost–benefit analysis.
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
29
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 CHAPTER IN A NUTSHELL
• Common resources are rival in consumption
but not excludable.
– Examples include common grazing land, clean
air, and congested roads.
– Because people are not charged for their use
of common resources, they tend to use them
excessively.
– Governments can remedy this problem:
regulations and corrective taxes, to limit the
use of common resources.
© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
30
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.