Exercises: Public and Private Goods

Define the two characteristics used to classify goods: rivalry and excludability. Then explain what it means for a good to be nonrival and nonexcludable.

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.

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.

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 table shows four goods and two features of each one.

(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.

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.

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 $\$50$ each.

• 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.

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.

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.