Part B: Quantitative Analysis (Show all your work with graphical analysis). Please read "The Economics of a Fishery" and "Incentives for Overfishing" from Chapter 4. Then complete the following problem: a). Fill in the missing data for TR, TC, Profit, AR, MC, and Profit per boat (using Excel formulas) in the following table: Boats Fish Q 100 Tons (in 100s) 1 10 2 20 3 30 4 40 5 48 6 54 7 58 8 60 9 60 10 58 11 54 12 48 13 40 TR ($) (in million) TC ($) (in million) Profit ($) (in million) MR ($) (in thousands) 10 10 10 10 8 6 4 2 0 -2 -4 -6 AR ($) (in thousands) MC; AC ($) (in thousands) (6 points) Profit/Boat ($) -8 b). Use this spreadsheet to create a graph of the fishery's total product as shown in Figure 4.1 on page 78 (Textbook). (2 points) c). Use this spreadsheet to plot the MR, AR, and MC curves for the fishery as shown in Figure 4.3 on page 82 (Textbook). (2 points) CHAPTER 11 Public Goods and Common Resources Economics PRINCIPLES OF N. Gregory Mankiw © 2009 South-Western, a part of Cengage Learning, all rights reserved In this chapter, look for the answers to these questions: ▪ What are public goods? What are common resources? Give examples of each. ▪ Why do markets generally fail to provide the efficient amounts of these goods? ▪ How might the government improve market outcomes in the case of public goods or common resources? 1 Introduction ▪ We consume many goods without paying: parks, national defense, clean air & water. ▪ When goods have no prices, the market forces that normally allocate resources are absent. ▪ The private market may fail to provide the socially efficient quantity of such goods. ▪ One of the Ten Principles from Chapter 1: Governments can sometimes improve market outcomes. PUBLIC GOODS AND COMMON RESOURCES 2 Important Characteristics of Goods ▪ A good is excludable if a person can be prevented from using it. ▪ Excludable: fish tacos, wireless internet access ▪ Not excludable: FM radio signals, national defense ▪ A good is rival in consumption if one person’s use of it diminishes others’ use. ▪ Rival: fish tacos ▪ Not rival: An MP3 file of Kanye West’s latest single PUBLIC GOODS AND COMMON RESOURCES 3 The Different Kinds of Goods Private goods: excludable, rival in consumption Example: food Public goods: not excludable, not rival Example: national defense Common resources: rival but not excludable Example: fish in the ocean Natural monopolies: excludable but not rival Example: cable TV PUBLIC GOODS AND COMMON RESOURCES 4 Rival? Yes Yes Excludable? No Private Goods • Ice-cream cones • Clothing • Congested toll roads Common Resources • Fish in the ocean • The environment • Congested nontoll roads PUBLIC GOODS AND COMMON RESOURCES No Natural Monopolies • Fire protection • Cable TV • Uncongested toll roads Public Goods • National defense • Knowledge • Uncongested nontoll roads 5 ACTIVE LEARNING 1 Categorizing roads ▪ A road is which of the four kinds of goods? ▪ Hint: The answer depends on whether the road is congested or not, and whether it’s a toll road or not. Consider the different cases. 6 ACTIVE LEARNING 1 Answers ▪ Rival in consumption? Only if congested. ▪ Excludable? Only if a toll road. Four possibilities: Uncongested non-toll road: public good Uncongested toll road: natural monopoly Congested non-toll road: common resource Congested toll road: private good 7 The Different Kinds of Goods ▪ This chapter focuses on public goods and common resources. ▪ For both, externalities arise because something of value has no price attached to it. ▪ So, private decisions about consumption and production can lead to an inefficient outcome. ▪ Public policy can potentially raise economic well-being. PUBLIC GOODS AND COMMON RESOURCES 8 Public Goods ▪ Public goods are difficult for private markets to provide because of the free-rider problem. ▪ Free rider: a person who receives the benefit of a good but avoids paying for it ▪ If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good. ▪ Result: The good is not produced, even if buyers collectively value the good higher than the cost of providing it. PUBLIC GOODS AND COMMON RESOURCES 9 Public Goods ▪ If the benefit of a public good exceeds the cost of providing it, govt should provide the good and pay for it with a tax on people who benefit. ▪ Problem: Measuring the benefit is usually difficult. ▪ Cost-benefit analysis: a study that compares the costs and benefits of providing a public good ▪ Cost-benefit analyses are imprecise, so the efficient provision of public goods is more difficult than that of private goods. PUBLIC GOODS AND COMMON RESOURCES 10 Some Important Public Goods ▪ National defense ▪ Knowledge created through basic research ▪ Fighting poverty PUBLIC GOODS AND COMMON RESOURCES 11 Common Resources ▪ Like public goods, common resources are not excludable. ▪ Cannot prevent free riders from using ▪ Little incentive for firms to provide ▪ Role for govt: seeing that they are provided ▪ Additional problem with common resources: rival in consumption ▪ Each person’s use reduces others’ ability to use ▪ Role for govt: ensuring they are not overused PUBLIC GOODS AND COMMON RESOURCES 12 The Tragedy of the Commons ▪ A parable that illustrates why common resources get used more than is socially desirable. ▪ Setting: a medieval town where sheep graze on common land. ▪ As the population grows, the # of sheep grows. ▪ The amount of land is fixed, the grass begins to disappear from overgrazing. ▪ The private incentives (using the land for free) outweigh the social incentives (using it carefully). ▪ Result: People can no longer raise sheep. PUBLIC GOODS AND COMMON RESOURCES 13 The Tragedy of the Commons ▪ The tragedy is due to an externality: Allowing one’s flock to graze on the common land reduces its quality for other families. ▪ People neglect this external cost, resulting in overuse of the land. PUBLIC GOODS AND COMMON RESOURCES 14 ACTIVE LEARNING 2 Policy options for common resources ▪ What could the townspeople (or their government) have done to prevent the tragedy? ▪ Try to think of two or three options. 15 ACTIVE LEARNING 2 Answers ▪ Impose a corrective tax on the use of the land to “internalize the externality.” ▪ Regulate use of the land (the “command-andcontrol” approach). ▪ Auction off permits allowing use of the land. ▪ Divide the land, sell lots to individual families; each family will have incentive not to overgraze its own land. 16 Policy Options to Prevent Overconsumption of Common Resources ▪ Regulate use of the resource ▪ Impose a corrective tax to internalize the externality ▪ example: hunting & fishing licenses, entrance fees for congested national parks ▪ Auction off permits allowing use of the resource ▪ example: spectrum auctions by the U.S. Federal Communications Commission ▪ If the resource is land, convert to a private good by dividing and selling parcels to individuals PUBLIC GOODS AND COMMON RESOURCES 17 Some Important Common Resources ▪ Clean air and water ▪ Congested roads ▪ Fish, whales, and other wildlife PUBLIC GOODS AND COMMON RESOURCES 18 CASE STUDY: “You’ve Got Spam!” ▪ Some firms use spam emails to advertise their products. ▪ Spam is not excludable: Firms cannot be prevented from spamming. ▪ Spam is rival: As more “Spam” email is named after everyone’s favorite delicacy. companies use spam, it becomes less effective. ▪ Thus, spam is a common resource. ▪ Like most common resources, spam is overused – which is why we get so much of it! PUBLIC GOODS AND COMMON RESOURCES 19 CONCLUSION ▪ Public goods tend to be under-provided, while common resources tend to be over-consumed. ▪ These problems arise because property rights are not well-established: ▪ Nobody owns the air, so no one can charge polluters. Result: too much pollution. ▪ Nobody can charge people who benefit from national defense. Result: too little defense. ▪ The govt can potentially solve these problems with appropriate policies. PUBLIC GOODS AND COMMON RESOURCES 20 CHAPTER SUMMARY ▪ A good is excludable if someone can be prevented from using it. A good is rival in consumption if one person’s use reduces others’ ability to use the same unit of the good. ▪ Markets work best for private goods, which are excludable and rival in consumption. Markets do not work well for other types of goods. 21 CHAPTER SUMMARY ▪ Public goods, such as national defense and fundamental knowledge, are neither excludable nor rival in consumption. ▪ Because people do not have to pay to use them, they have an incentive to free ride, and firms have no incentive to provide them. ▪ Therefore, the government provides public goods, using cost-benefit analysis to determine how much to provide. 22 CHAPTER SUMMARY ▪ Common resources are rival in consumption but not excludable. Examples include common grazing land, clean air, and congested roads. ▪ People can use common resources without paying, so they tend to overuse them. Therefore, governments try to limit the use of common resources. 23 TEST # 3 – CHAPTER 4 Chapter 4: Common Property Resources and Public Goods Name __________________Weijiang Fan_______________________ Test Score________ Part A: Multiple-choice Questions (40 points) 1. Which one of the following is the least-likely to be subject to exploitation as a common property resource? 1) 2) 3) 4) 5) The atmosphere An open-ocean fishery A public park A parking lot A river 2. What is the typical shape of a total product curve? 1) 2) 3) 4) 5) An S-shape A U-shape An inverted U-shape A constantly increasing line A constantly decreasing line 3. The open access equilibrium for a common property resource occurs at the point where... 1) 2) 3) 4) 5) Average revenue equals marginal cost Total social benefits are maximized Total private benefits are maximized Marginal revenue equals marginal cost Marginal revenue equals total costs 4. The economic optimum production level for a common property resource occurs where ... 1) 2) 3) Total revenue equals total costs Average revenue equals marginal cost Average revenue equals average cost 4) 5) Marginal revenue equals total costs Marginal revenue equals marginal cost 5. The open access equilibrium is usually ... 1) 2) 3) 4) 5) Economically efficient but ecologically unsustainable Economically efficient and ecologically sustainable Economically inefficient but ecologically sustainable Neither economically efficient nor ecologically sustainable Highly profitable for resource users 6. Which one of the following variables is most likely to increase as production effort is increased? 1) 2) 3) 4) 5) Net revenue Marginal costs Marginal revenue Total costs Average revenue 7. Which one of the following variables is most likely to decline as production effort increases? 1) 2) 3) 4) 5) Marginal cost Total revenue Marginal revenue Total costs Total production 8. The efficient price of a license fee is determined by the difference between ... 1) 2) 3) 4) 5) Marginal revenue and marginal cost Average revenue and marginal cost Total revenue and total cost Average revenue and total cost Total revenue and marginal cost 9. Which one of the following statements is false? 1) 2) 3) The economically optimal level of production is less than the open-access equilibrium level of production The economically optimal level of production occurs at the maximum sustainable yield Charging a license fee for access to a common resource will reduce the production level below the open-access equilibrium 4) 5) The “tragedy of the commons” is more likely to occur as production effort increases A license fee will reduce the incentives for entry into a market 10. Which one of the following is least likely to be considered a public good? 1) 2) 3) 4) 5) An interstate highway A national park Wildlife A river A golf course 11. A characteristic of public goods is that use of the good by one person does not reduce its availability to others. The term for this characteristic is... 1) 2) 3) 4) 5) Non-exclusive Transferable Non-rival Perfectly elastic Free-rider 12. The two characteristics of a public good are: 1) 2) 3) 4) 5) Non-rival and inelastic Non-exclusive and non-priced Non-rival and non-priced Non-exclusive and inelastic Non-rival and non-exclusive 13. Which one of the following statements about public goods is true? 1) 2) 3) 4) 5) Problems with public goods can always be solved by charging a fee to use the good Public goods may provide psychic benefits Public goods will tend to be oversupplied Money to provide public goods is commonly collected from free riders Public goods are any goods owned or provided by governments 14. Suppose that 10,000 people are willing to spend a maximum of $20 each to preserve one acre of rainforest. A conservation group mails out a request to each person asking him or her to mail in $40 to preserve one acre of rainforest. How many acres of rainforest will be preserved with this program? 1) 2) Zero acres 1,000 acres 3) 4) 5) 5,000 acres 10,000 acres There is not enough information to answer the question 15. If 10,000 people are willing to spend a maximum of $20 each to preserve one acre of rainforest, how many acres of rainforest could be preserved, at $40 per acre without exceeding people’s willingness to pay? 1) 2) 3) 4) 5) Zero acres 1,000 acres 5,000 acres 10,000 acres There is not enough information to answer the question 16. The socially optimal provision of a public good can be obtained by ... 1) 2) 3) 4) 5) Privatizing the good Vertically adding the demand curves for the good Horizontally adding the demand curves for the good Eliminating access to the good Allowing open access to the good 17. Which one of the following goods can be considered a global commons? 1) 2) 3) 4) 5) A National Park A river An ocean A herd of deer A diamond mine 18. The “tragedy of the commons” is most likely to occur with which one of the following goods? A national forest A mineral ore deposit A public highway A groundwater aquifer A city park 19. Which one of the following statements is false? 1) 2) Global warming and ocean pollution are examples of global commons issues Solving problems with global commons usually requires international cooperation 3) 4) 5) Problems with the global commons are becoming more prevalent as human economic activity increases Problems with global commons occur because countries view their global environmental impacts as externalities Solving problems involving global commons is not possible because of free rider effects 20. Which one of the following statements is false? 1) 2) 3) 4) 5) Market solutions are always economically efficient Problems with global commons are partly a result of free riding Public preferences are not always expressed in markets Public and private preferences may differ Public goods often tend to be undersupplied Part B: Quantitative Analysis (Please see attached Spreadsheet).
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