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Microeconomics

Types of Goods
Session 12

July 2018
Session Objectives

Types of goods

– Private goods
– Public goods
• Quasi public goods (merit goods)
– Non-rival private goods (club goods, artificially scarce
good)
– Common resources
• Tragedy of the commons

• Implications for market equilibrium

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National Disaster warning system
Public goods
Have positive externalities

Characteristics –

– Non-excludable: When people who don’t pay cannot be


easily prevented from using a good

– Non-rival: When one person’s use of a good does not


reduce the ability of another person to use the same good
Theory of Public Goods developed by
Paul Samuelson, the Nobel prize in Economics,
1970
Roads

• Largely non-excludable – city roads, but exclusion


possible on some roads (toll)

• Rival in consumption as more people use it and leads


to congestion

• Quasi public good/Merit good – public good with a


private good feature
Education and healthcare?
Significant individual benefit and some spillover benefits
(positive externality). Hence, some subsidy can be justified.

Exclusion is common – fee based


Rival in nature – large class sizes, the quality of learning falls.

Online education –
non-rival
Exclusion feasible
Main features Public goods Merit goods (tend to be
largely private goods)
Rivalry Non-rival rival

Excludability Non-excludable Excludable (people can


underestimate social benefit)

Benefits Strong positive externalities Large Individual benefit and


positive externalities

Provider Usually government Government and/or private


enterprise
Financed by Usually taxation Taxes and/or prices

Examples National defence, law and order, Health, education


street lights, lighthouses
Net benefit to individuals

A street light has a cost of 6. The utility of the light is 4.

Veeru

Pay and share


Do not pay
the cost

Raja Pay and share


1, 1 -2, 4
the cost

Do not pay 4, -2 0,0

What is the Nash equilibrium?

Free ride on others, under provision of public goods


• The incentive for the individual is to let others produce the
good and then use it once it is available for free.

• This is known as the free-rider problem: individuals have little


incentive to pay for their own consumption and instead will
take a “free-ride” on anyone who does pay.

• As a result, non-excludable goods tend to be under-produced.


Will the outcome change if the sufficiently large
penalty is imposed for not paying?

What should be the minimum penalty to ensure


compliance?
Net benefit to individuals

A penalty is imposed of 2 for non-payment and is enforced.

Veeru

Pay and share


Do not pay
the cost

Raja Pay and share


1, 1 1, -1
the cost

Do not pay -1, 1 -1,-1

What is the Nash equilibrium?

Free ride on others, under provision of public goods


Public Goods

• Failure to provide public goods at the optimal level


can create substantial social costs

• Thus, the need to produce public goods provides a


strong argument for taxation and government
provision.

• But, some citizen become forced riders (via taxation)


How much of Public Goods?
• If the government provides the public good, how much of it
should the government produce?

• In practice this could be quite problematic.


– How much the societies value the good will not be known to
the government.
– For private goods, these problem is solved by the markets

• Voting and other democratic processes can help to produce


optimal amounts of public goods.

• Cost efficiency and innovation tends to suffer


Government provision of public good
in the Chinese style!
• One of Beijing’s busiest public toilets is fighting the scourge of toilet paper
theft through the use technology – giving out loo roll only to patrons who
use a face scanner.

• The automated facial recognition dispenser comes as a response to elderly


residents removing large amounts of toilet paper for use at home.

• Now, those in need of paper must stand in front of a high-definition camera


for three seconds, after removing hats and glasses, before a 60cm ration is
released.

• Those who come too often will be denied, and everyone must wait nine
minutes before they can use the machine again.

Source: The Guardian (2017)


Public Goods

• Note - A public good is not defined as a good that is produced


in the public sector.

– If government started to produce soap, TVs, cloths that


would not make them public goods

– Postal service is provided by government, but it is not a


public good.

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Does public good have to be provided by the
government?
Is it possible to tie a public good with a private good?

• Public goods and private goods are sometimes ‘tied’ together.


Shopping malls – benches, restrooms, security - provide these
‘public goods

• Role for private entrepreneurs


Radio and television
Non-rival in consumption
Earlier, exclusion was not possible
It was a public good.

In the early decades of broadcasting, exclusion was not


technologically possible

But technology to “scramble” and de‐scramble TV signals was


invented So that broadcasters could charge a fee and exclude
non‐payers. (BBC charges license fee)
Scrambling technology has been superseded by cable and satellite
transmission, in which exclusion is possible.
Non-rival private good, an Artificially Scarce
Good
Price of pay-per-view movie

Deadweight loss
$4

D
0 Q Q
MKT OPT
Quantity of pay-per-view movies watched
 An artificially scarce good or non-rival private good is
excludable but nonrival in consumption.

 Because the good is nonrival in consumption, the efficient


price to consumers is zero.

 However, because it is excludable, sellers charge a


positive price, which leads to inefficiently low
consumption
http://what3words.com/

While non-rival in consumption, now it is excludable

Identifies every one of the 57 trillion 3mx3m squares on


the entire planet with just three, easy to remember,
words.
• Other examples of artificially scarce good

– Computer software
– Pay-per view-movies
– Wi-fi (assuming there is no congestion)
Seinfeld – the parking space argument

Think about two features – rival v/s non-rival


excludable v/s non-excludable

A common resource - Unlike pure public goods, common


resources face problems of congestion or overuse, because they
are rival in consumption. Examples of common resources include
irrigation systems, fishing grounds, pastures, forests, water,
roads.
• Why tuna is
endangered but not
chickens?

• Demand for chicken


higher than tuna
Common Resources and The Tragedy of the
Commons
• Since 1960 the tuna catch has decreased by 75%

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Tragedy of commons
• Non-excludable but rival.
• You cant stop me from consuming the good
• And more I consume means less is available for you
• The resource depletes

Non-excludable: When people who don’t pay cannot be easily


prevented from using a good

But, rival in consumption - When one person’s use of a good


reduce the ability of another person to use the same good

Tragedy of commons - Tendency of any resource that is


unowned, and hence nonexcludable, to be overused and
39under-maintained – William Llyod 1833.
Tragedy of commons – the video
Elinor Ostrom –

Happy solutions to the tragedy


of Commons

The Noble prize in 2009


Solutions to the Tragedy of the Commons

• Enforcement of norms:
• Possible in small groups or majority people altruistic
• Overfishing - social disapproval.
• One who honors the norms is respected.

• Command and control is often ineffective:


• Limit the number fishing boats
– Fishing boats were made more efficient.
• Limit the number of days that fishing is allowed.
– Fishermen found ways to catch more fish/day.

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Private Goods

Excludable and rival – most goods

• Efficiently provided in competitive markets.


– Strong incentive to pay for and thus to produce these goods.

– Since the goods are rival, excludability does not lead to


inefficiency.
• The only people excluded from consuming a private good
in a competitive market are those who are not willing to
pay the costs of production.
Four Types of Goods

Four Types of Goods

Excludable Non-excludable

Rival Private Goods Common Resources


Jeans Tuna in the Ocean
Hamburgers The Environment
Contact Lenses Public Roads

Non-rival Nonrival Private Goods Public Goods


(club gods) Asteroid Deflection
Cable TV National Defense
Wi-Fi Mosquito Control
Digital Music
Has the rise of the Internet and file sharing turned media such as
movies and music into public goods?

• Movies and music are nonrivalrous but they used to be


excludable, making them nonrival private goods.

• Today, however, the ease of copying makes digital movies and


music nonexcludable. That makes movies and music transform
into public goods for a large portion of the population.