Toll Roads
PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University
N. GREGORY MANKIW
PRINCIPLES OF
ECONOMICS Eight Edition
Public Goods and Common Resources
CHAPTER
11
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The Different Kinds of Goods
• Excludability – Property of a good whereby a person can
be prevented from using it • Rivalry in consumption
– Property of a good whereby one person’s use diminishes other people’s use
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The Different Kinds of Goods • Private goods
– Excludable & Rival in consumption • Public goods
– Not excludable & Not rival in consumption • Common resources
– Rival in consumption & Not excludable • Club goods
– Excludable & Not rival in consumption – One type of natural monopoly
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Figure 1 Four Types of Goods
Goods can be grouped into four categories according to two characteristics: (1) A good is excludable if people can be prevented from using it. (2) A good is rival in consumption if one person’s use of the good diminishes other people’s
use of it. This diagram gives examples of goods in each category.
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The Different Kinds of Goods
• Public goods and common resources – Not excludable
• People cannot be prevented from using them • Available to everyone free of charge
– No price attached to it – External effects
• Positive externalities (public goods) • Negative externalities (common resources)
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The Different Kinds of Goods
• Public goods and common resources – Private decisions about consumption and
production • Can lead to an inefficient allocation of
resources – Government intervention
• Can potentially raise economic well-being
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Public Goods
• Free rider – Person who receives the benefit of a good
but avoids paying for it • The free-rider problem
– Public goods are not excludable – Prevents the private market from
supplying the goods – Market failure
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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
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“I like the concept if we can do it with no new taxes.”
Public Goods
• Some important public goods – National defense
• Very expensive public good • $748 billion in 2014
– Basic research • General knowledge • Subsidized by government • The public sector fails to pay for the right
amount and the right kinds
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Public Goods
• Some important public goods – Antipoverty programs financed by taxes
• 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 10
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Are lighthouses public goods?
• Lighthouses – Mark specific locations so that passing ships can avoid treacherous waters
• Benefit: to the ship captain • Not excludable, not rival in
consumption • Incentive: free ride without
paying – Most are operated by the
government 11
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What kind of good is this?
Are lighthouses public goods?
• In some cases – Lighthouses are closer to private goods
• Coast of England, 19th century • Lighthouses were privately owned and
operated • The owner of the lighthouse charged the
owner of the nearby port – If the port owner did not pay, lighthouse
owner turned the light off: ships avoided that port
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Are lighthouses public goods?
• Decide whether something is a public good – Determine who the beneficiaries are – Determine whether the beneficiaries can
be excluded from using the good • A free-rider problem
– When the number of beneficiaries is large – Exclusion of any one of them is
impossible
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Public Goods
• The difficult job of cost–benefit analysis – Government
• Decide what public goods to provide • In what quantities
– Cost–benefit analysis • Compare the costs and benefits to society of
providing a public good • Doesn’t have any price signals to observe • Government findings: rough approximations
at best 14
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How much is a life worth?
• Cost: $10,000 for a new traffic light • Benefit: increased safety
– Risk of a fatal traffic accident • Drops from 1.6 to 1.1%
• Obstacle – Measure costs and benefits in the same
units • Put a dollar value on a human life?
– Priceless = infinite dollar value
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How much is a life worth?
• Implicit dollar value of a human life – Courts: award damages in wrongful-
death suits • Total amount of money a person would have
earned if he or she had lived • Ignores other opportunity costs of losing
one’s life – Risks that people are voluntarily willing to
take and how much they must be paid for taking them • Value of human life = $10 million
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How much is a life worth?
• Cost–benefit analysis – Traffic light
• Reduces risk of fatality by 0.5 percentage points
– Expected benefit = 0.005 × $10 million = $50,000
– Cost ($10,000) < Benefit ($50,000) – Approve the traffic light
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ASK THE EXPERTS
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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.”
Common Resources
• Common resources – Not excludable – Rival in consumption
• The tragedy of the commons – Parable that shows why common
resources are used more than desirable • From society’s standpoint
– Social and private incentives differ – Arises because of a negative externality
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Common Resources
• The tragedy of the commons – Negative externality
• One person uses a common resource diminishes other people’s enjoyment of it
• Common resources tend to be used excessively
– Government can solve the problem • Regulation or taxes to reduce consumption of
the common resource • Turn the common resource into a private good
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Common Resources
• Some important common resources – Clean air and water
• Negative externality: pollution • Regulations or corrective taxes
– Congested roads • Negative externality: congestion • Corrective tax: charge drivers a tool • Tax on gasoline
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Common Resources
• Some important common resources – Fish, whales, and other wildlife
• Oceans: the 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
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Why the cow is not extinct
• Animals with commercial value that are threatened with extinction – Buffalo
• North America • Hunting in the 19th century
– Elephants • African countries • Hunting today
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“Will the market protect me?”
Why the cow is not extinct
• The cow – Commercial value – Species continues to thrive
• Cows are a private good – Ranches are privately owned – Rancher: great effort to maintain the
cattle population on his ranch • Reaps the benefit
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Why the cow is not extinct
• Elephant - common resource – Poachers are numerous
• Strong incentive to kill elephants • Government of Kenya, Tanzania, and
Uganda – Illegal to kill elephants and sell ivory – Hard to enforce laws – Decreasing population of elephants
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Why the cow is not extinct
• Government of Botswana, Malawi, Namibia, and Zimbabwe – Made elephants a private good – People can kill elephants on their own
property – Landowners have an incentive to
preserve the species – Elephant populations have started to rise
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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
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Importance of Property Rights • The government can potentially solve the
problem – 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
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