Unit 10 Market successes and failures: The societal effects of private decisions

10.7 Public goods and bads, open access, and shared resources

Examples of public goods, some of which we have discussed already, are:

• national defence
• clean air
• knowledge
• street lighting
• community irrigation system
• crime prevention
• radio broadcasting.

All of these goods share the characteristic of non-rivalry, the primary characteristic of public goods. Knowledge isn’t used up if one person makes use of it; a street light helps you find your way just as effectively if someone else passed by earlier; all law-abiding members of the community benefit if crime is low in their neighbourhood.

excludable public good, club good

A good that is non-rival (can be supplied to more users at no additional cost) but excludable (it is possible to prevent people from using it) may be called an excludable public good, or a club good.

Economists often define public goods as goods that are both non-rival and non-excludable. We prefer to think of non-rivalry as the primary characteristic. So we describe non-rival goods for which exclusion is feasible as excludable public goods, as we did in the previous section. This term is frequently used and well understood, whatever formal definition of public goods is used.

Excludability is a characteristic that can be changed, either as a result of the development of technologies for exclusion, as in the case of broadcasting, or by introducing legal restrictions. Some countries finance broadcasting by requiring users to pay for a television licence, with monitoring and legal enforcement. More importantly, whether or not excludability is possible, the value of the good to consumers is the same, and the economic problem remains: private providers will not supply a non-rival good at the Pareto-efficient level, and depending on costs—both of the good itself, and the exclusion technology—may not supply it at all.

Other examples of excludable public goods are the information in a copyrighted book, or a film shown in an uncrowded cinema: it costs no more if an additional viewer is there, but the owner can nonetheless require a payment to see the film. The same goes for a toll bridge, or a quiet road on which toll gates have been erected. Drivers can be excluded (unless they pay the toll) even though the marginal cost of an additional traveller is zero.

excludable public good, club good

A good that is non-rival (can be supplied to more users at no additional cost) but excludable (it is possible to prevent people from using it) may be called an excludable public good, or a club good.

copyright

Ownership rights over the use and distribution of an original work.

artificially scarce

A good is artificially scarce if it is non-rival (can be supplied to more users at no additional cost) but some users are excluded from using it, either directly or because the price is greater than their willingness to pay. See also: excludable public good.

Excludable public goods are sometimes called artificially scarce, or club goods. They can function a bit like joining a private club: adding one more member costs the golf club nothing (at least, if the golf course is not crowded) but the club will still charge a membership fee. But some don’t seem much like clubs: a copyrighted book or a toll bridge, for example, are also ‘club goods’.

Public bads

‘Goods’ in economics are things that people want to use or consume. But there are also ‘bads’: things that people don’t want, and might be willing to pay to not have, such as household refuse, or unpleasant-smelling drains. These are private bads. Analogously, we can define public bads: air pollution, for example, is a bad that affects many people simultaneously. It is non-rival in the sense that one person suffering its effects does not reduce the suffering of the others. Atmospheric CO₂ is a global public bad.

The characteristic analogous to excludability in the case of public bads is whether people can be protected from suffering their effects. We might describe an epidemic disease such as polio as a public bad, which became ‘excludable’ as a result of the development of a vaccine.

Open-access resources, shared resources, and governance

open-access resource

A resource that is rival or partially rival (more people using it reduces the benefits to others) but non-excludable (it is impossible to exclude anyone from using it).

common-pool resource

A resource that is rival or partially rival (more people using it reduces the benefits to others) but non-excludable within a community of users. All members of the community are able (and in some cases have a legal right) to use it, but outsiders can be excluded.

Other types of goods that have some features in common with public goods are open-access resources and shared resources known as common-pool resources.

Open-access environmental resources

Humans have been eating fish from the ocean for around 150,000 years. For most of history, fish stocks were a public good—one person catching a fish had no effect on the availability of fish to others. Moreover, since fish stocks simply existed, there was no downside: they were not subject to the problem of free-riding that affects public goods produced by humans. But as human populations and the technology of fishing expanded, the extraction of fish began to outstrip the ability of fish populations to reproduce, and fish stocks began to decline.

Once the level of fishing is sufficiently high to endanger fish stocks, fishing is costly. It is no longer non-rival, because when one trawler brings in its catch, there are fewer fish left for others. The cost of resource depletion is shared by everyone who wants to catch fish, now and in the future. In other words, the private marginal cost of fishing is much lower than the social marginal cost. Like other activities with negative external effects, people do too much of it. A similar story applies to other environmental resources: the atmosphere, the ozone layer, and biodiversity could once be regarded as non-rival, but have more recently been damaged or depleted by human activity.

Common land and shared resources

The phrase ‘tragedy of the commons’ is used to describe cases like ocean fishing, in which open access leads to overexploitation of resources. Applied to herders grazing their animals on common land, it would suggest that since the private cost of adding another animal is below the social cost, the pasture would be overgrazed. But common land is more accurately described as a resource shared by a specific community of users. The group members have an incentive to cooperate in managing the resource, avoiding the ‘tragedy’. This is not always successful, but the work of Elinor Ostrom, described in Unit 4, shows how communities can manage shared resources sustainably through social norms and preferences, and agreed systems of governance.

Even in the case of open-access environmental resources, it may be possible to develop systems of governance based on local or international agreements that protect resources from depletion. The European Union sets ‘total allowable catches’ for over 200 commercial fish stocks in both EU and international waters. International negotiations on climate change and the ozone layer are described in Unit 4.

congestible public goods

If a public good becomes partially rival as more people use it, it may be described as a congestible public good.

The argument about overuse of shared resources can also be applied to public roads and highways, and public amenities such as parks and swimming pools. When only a few people use them, they are public goods, but as the number of people using them increases they become congested, and hence at least partially rival. Each extra user—the marginal user—affects the value of the good for other users. They are sometimes called congestible public goods.

We know that excluding consumers from non-rival goods results in a Pareto-inefficient allocation. But when public amenities become congested, exclusion may be exactly what is needed to restore efficiency. For example, an entrance charge to a publicly owned swimming pool, exactly equal to the marginal cost an additional swimmer imposes on others using the pool, could (in principle) ensure an efficient allocation. Those excluded would be people whose valuation of swimming was less than the social cost of the congestion they would cause. Such a charge may not be sufficient to cover the full cost of building and maintaining the pool; nevertheless we would expect the social losses of private provision to be lower for goods that become rival as a result of overuse.

Classifying goods

private good

A good that is rival (when one person consumes a unit of the good, that unit is not available to others) and excludable (people can be prevented from consuming it).

We have discussed many examples of private goods: loaves of bread, clothing, a lottery prize divided between Zoë and Yvonne (Unit 4) and boxes of breakfast cereal. Private goods are both rival (more for Zoë means less for Yvonne) and excludable (Zoë can prevent Yvonne from taking her money).

At the other extreme are what are sometimes called pure public goods, like national defence, or knowledge, which are entirely non-rival (the marginal cost of an additional consumer is zero) and non-excludable (it is impossible to exclude people from their benefits).

Goods are sometimes classified according to rivalry and excludability in a 2 × 2 matrix. But the true picture is more complicated: the extent of rivalry or excludability in goods is a matter of degree. Some goods are rival in some circumstances, but not in others. Excludability varies with governance and the legal system, and with technology; even if feasible, it is not necessarily used, or desirable.

In Figure 10.9, we have classified some of the goods discussed in this section. The excludability row includes goods for which exclusion is possible in principle, even if—as in the case of public roads and parks—it is rarely used. The intermediate column includes the many important goods that are rival in some circumstances, but not all.

Analysing goods in terms of their rivalry and excludability helps us to determine how they can be allocated most efficiently. Markets typically allocate private goods (although where there is little competition, the allocation is unlikely to be Pareto efficient). Otherwise:

• When goods are non-rival, the marginal cost is zero: Setting a price equal to marginal cost (as is necessary for a Pareto-efficient market transaction) will not be possible unless the provider is subsidized.
• If non-rival goods are also excludable, market provision may be possible, although the allocation is unlikely to be Pareto efficient.
• When goods or resources are not excludable, there is no way to charge a price for them: Produced goods will not be privately provided and resources will be overused.

patent

A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time, it effectively allows the owner to be a monopolist or exclusive user.

So when goods are not private, public policy may be required to allocate them. National defence is a responsibility of the government in all countries. Environmental policy addresses problems of common-pool resources and public bads such as pollution, and carbon emissions. Governments also adopt a range of policies to address the problem of knowledge as a public good, such as issuing patents to give firms an incentive to undertake research and development (R&D) (Unit 21 from the first edition of The Economy).

Although we have focused on non-rivalry and non-excludability in this section, all of the problems associated with public goods and shared resources can be interpreted in terms of external effects—where decision-makers don’t take into account the full social marginal costs and benefits of their actions. Figure 10.10 summarizes the features of some of the examples we have discussed in this and the previous section using the same framework as in Figure 10.6.