Commons , Collective, and Public Goods: Part II

June 3, 2013

Announcements• Last day of new material!• Practice final and notes from today will be on site

tonight.• Wed and Fri classes will be all final review.• Jake will also run a final review session (location time

/ TBA).

Last Time• Started talking about goods: commons,

collective, public, and private.• Tragedy of the commons

Learning Goals for Today• Differentiate public and private goods in

detail.• Explain the problems the government runs

into in funding public goods.

Definitions and ExamplesNonrival Goods: Consumption by one person does not diminish availability to others.

Nonexcludable Goods: It is difficult to exclude nonpayers from consuming them.

Rival Nonrival

Nonexcludable

Excludable

Public Goods

Collective Goods

Commons Goods

Private Goods

Definitions and ExamplesNonrival Goods: Consumption by one person does not diminish availability to others.

Nonexcludable Goods: It is difficult to exclude nonpayers from consuming them.

Rival Nonrival

Nonexcludable

Excludable

Public Goods

Collective Goods

Commons Goods

Private Goods

Let’s focus now on Public vs Private goods.

Public Goods vs Private Goods: Excludability

• Since private goods are nonexcludable, it’s hard to profit off of them.

• Usually, provided by the government.• What are example of nonexcludable and

nonrival goods that are privately provided?

Which of the following is an example of a public good that is privately provided?

A. Community GardensB. MercenariesC. CommercialsD. Internet Service

Public Goods vs Private Goods: Rivalness

• Recall: how do we generate a market demand line for a private good?

• Private goods RIVAL: individual consumers must purchase individual goods (Add Q).

• What is the key difference for public goods?• Public goods are NONRIVAL: individual consumers can

share the cost of goods (Add P).

Let PD(1)=24-(2/3)Q and PD(2)=18-(3/4)Q. Compute PD(1+2). What are U and V?

A. U=18, V=8 B. U=24, V=8 C. U=24, V=24 D. U=42, V=8

P

Q

U

V

Collective Goods: The Internet

• Internet use is certainly excludable.• Is it nonrival?– If definitely yes, internet is collective.– If not quite, internet is between private and

collective.

Rival Nonrival

Nonexcludable

Excludable

Public Goods

Collective Goods

Commons Goods

Private Goods

Collective Goods: The Internet

• Let’s talk about Verizon.• What is the effect on this firm’s profits of

providing increased / decreased bandwidth?– Scarcity

Rival Nonrival

Nonexcludable

Excludable

Public Goods

Collective Goods

Commons Goods

Private Goods

Rank the following in terms of highest probable profits to lowest probable profits

A. collective, private, commons, publicB. private, collective, commons, publicC. private, collective, public, commonsD. commons, public, collective, private

Crowding Out and Tax Disincentives

• Since many public goods are funded by the government, the government needs to raise money.– Tax– Issue bonds