Public and Private Goods
It's the Fourth of July, and a fireworks show lights up the sky over your town. Everyone in the neighborhood can watch it from their backyards, and nobody had to buy a ticket. So who pays for it? And why don't food trucks, which sell tacos to anyone willing to pay, have the same problem? The answer depends on two features of a good.
Two questions about any good
Economists sort goods by asking two questions.
A slice of pizza is rival: if you eat it, I can't. It is also excludable: the food truck won't hand it over until you pay. A fireworks show is nonrival: 10 more people watching doesn't dim it for anyone else. It is also nonexcludable: you can't stop people from looking up.
Rivalry is about using up the good. Excludability is about being able to charge.
Define the two characteristics used to classify goods: rivalry* and excludability*. Then explain what it means for a good to be nonrival* and nonexcludable*.
Define the two characteristics used to classify goods: rivalry and excludability. Then explain what it means for a good to be nonrival and nonexcludable.
Four types of goods
Combine the two questions and you get four types of goods.
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Private good (rival and excludable): sneakers, a pizza slice. Markets work well here.
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Public good (nonrival and nonexcludable): national defense, a lighthouse, a flood siren.
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Common resource (rival and nonexcludable): fish in the ocean, a crowded public beach, clean air.
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Club good (nonrival and excludable): a streaming service, cable TV, an uncrowded toll road. Many are natural monopolies: one firm can serve everyone at a low average cost, so the firm can charge fees but adding another viewer costs almost nothing.
Classify each good as a private good, public good, common resource, or natural monopoly (club good). Use rivalry and excludability to justify each answer: (a) A slice of…
Classify each good as a private good, public good, common resource, or natural monopoly (club good). Use rivalry and excludability to justify each answer:
(a) A slice of pizza from a food truck.
(b) National defense.
(c) Fish in the Gulf of Mexico.
(d) A streaming service with a monthly subscription.
The free-rider problem
Why do markets work for pizza but not for fireworks? With a nonexcludable good, you can enjoy it whether or not you pay.
Think of a group project at school. If the grade is shared and one student does all the work, the others "ride free." If everyone thinks that way, the project never gets done.
The key lesson is that a good can be worth more than it costs, but the market still won't supply it, because sellers can't collect payment.
In your own words, define the free-rider problem*. Give one example from daily life, such as a group project at school, in which someone could benefit without paying.
In your own words, define the free-rider problem. Give one example from daily life, such as a group project at school, in which someone could benefit without paying.
Three roommates in an apartment in Miami each value a clean shared kitchen at $\$40$ per month. Hiring a cleaning service costs $\$90$ per month. Nobody can be kept from…
Three roommates in an apartment in Miami each value a clean shared kitchen at $\$40$ per month. Hiring a cleaning service costs $\$90$ per month. Nobody can be kept from using the kitchen.
(a) Is hiring the service efficient? Show your calculation.
(b) If each roommate decides alone whether to pay the full $\$90$, what is each likely to do, and why?
(c) Suggest one way the roommates could solve the problem.
Is a public good worth providing?
To decide, use the same cost-benefit logic you've already seen. Because a public good is nonrival, everyone benefits from the same unit, so you add up everyone's value.
Note the difference from a private good: with a pizza, only one person gets the benefit. With a public good, the whole community does.
When free riding blocks a private solution, communities have several ways to fix it:
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Government provision paid by taxes. Taxes force everyone to contribute, which removes free riding. National defense and flood sirens work this way.
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Voluntary or nonprofit funding. Donations, charities, and fundraisers can work for small groups where people know each other.
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Agreements in small groups. Roommates or neighbors can split a bill by rule, so no one can ride free.
A neighborhood in Phoenix has 100 households. A fireworks show on the Fourth of July costs $\$2,000…
A neighborhood in Phoenix has 100 households. A fireworks show on the Fourth of July costs $\$2,000$ to put on, and every household that lives nearby can watch it from home at no extra cost. Each household values the show at $\$30$.
(a) What is the total value of the show to the neighborhood?
(b) Is it efficient for the show to take place? Explain.
(c) Explain why a private company would likely not put on the show if it relied on voluntary payments, and name the problem involved.
A small town has 1,000 residents who would benefit from a new flood-warning siren system. Residents fall into two groups: 600 residents value the system at $\$50…
A small town has 1,000 residents who would benefit from a new flood-warning siren system. Residents fall into two groups:
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600 residents value the system at $\$50$ each.
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400 residents value it at $\$20$ each.
The system costs $\$40,000$ to install, and it protects everyone once it exists.
(a) Calculate the total benefit and decide whether the system is efficient.
(b) If the town raises money only through voluntary donations and each person gives only if their own gift could cover the full cost, explain what is likely to happen.
(c) Explain why the market tends to underprovide this good, using the terms nonrival, nonexcludable and free rider.
(d) Propose a government solution, such as funding through taxes. Argue one advantage and one possible problem with it.
Common resources and the tragedy of the commons
A common resource is the opposite problem. Nobody can be kept out (nonexcludable), but each person's use leaves less for others (rival). So people use it too much.
Here is how it works. A boat owner deciding whether to join a fishery compares their average catch with their cost. But the new boat also reduces everyone else's catch, and that harm is ignored. The efficient choice compares the marginal catch (the extra fish the whole fishery gets) with the cost.
The average catch line crosses the cost line at 6 boats (open access). The marginal catch line is below the cost line from the 4th boat on, so the efficient number is 3.
Solutions include limits on fishing seasons or catch, licenses or tradable permits, and assigning property rights so someone has an incentive to protect the resource.
A table shows four goods and two features of each one. | Good | Can others be stopped from using it? | Does one person's use reduce what is left for others? |…
A table shows four goods and two features of each one.
| Good | Can others be stopped from using it? | Does one person's use reduce what is left for others? |
|---|---|---|
| Lighthouse | No | No |
| Public beach with no fee | No | Yes, when crowded |
| Movie in a theater | Yes | No (until seats run out) |
| Sneakers | Yes | Yes |
(a) Classify each good as a public good, common resource, club good, or private good.
(b) For the good you labeled a common resource, explain what problem can arise and why.
A lake in Minnesota is open to all. Fishing boats pay nothing to fish there, and each additional boat reduces the catch of every other boat. The table shows the total…
A lake in Minnesota is open to all. Fishing boats pay nothing to fish there, and each additional boat reduces the catch of every other boat. The table shows the total fish catch (in hundreds of pounds per week) for different numbers of boats.
| Boats | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Total catch | 10 | 18 | 24 | 28 | 30 | 30 |
Each boat costs the owner the equivalent of 6 (hundred pounds) in fuel and labor per week.
(a) Calculate the average catch per boat and the marginal catch from each added boat.
(b) Find how many boats enter if boats keep entering as long as the average catch exceeds the cost, and find the number that maximizes the net catch (total catch minus total cost).
(c) Explain, with the idea of a common resource, why the two numbers differ.
(d) Describe two policies that could bring the number of boats closer to the efficient level.
Back to the start: the Fourth of July fireworks are a public good. They are nonrival and nonexcludable, so every household can free ride, a private firm can't collect payment, and the town (or a group of neighbors) must organize the funding.