Public Goods and Common Resources 11 Public Goods and Common Resources Economics P R I N C I P L E S O F N. Gregory Mankiw This chapter is shorter than average. (In many other textbooks, a single chapter combines this material with externalities.) It’s also less analytically challenging than average, so most students find it less difficult – especially when covered immediately after the externalities chapter. Most instructors are able to cover this chapter in a single class session. This PowerPoint presentation includes a case study on Spam email. This case study does not appear in the textbook. Premium PowerPoint Slides by Ron Cronovich

In this chapter, look for the answers to these questions: What are public goods? 공공재란 무엇인가? What are common resources? 공유자원이란 무엇인가? Give examples of each. 그 예를 제시 Why do markets generally fail to provide the efficient amounts of these goods? 왜 시장은 일반적으로 이 재화들을 효율적인 양만큼 제공해주지 못하는가? How might the government improve market outcomes in the case of public goods or common resources? 공공재나 공유자원의 경우 정부는 어떻게 시장의 결과를 개선할 수 있는가? 1

Introduction We consume many goods without paying: parks, national defense, clean air & water. 우리는 대가를 지불하지 않고 많은 재화들을 소비한다. 공원, 국방, 맑은 공기와 물 등이 그렇다. When goods have no prices, the market forces that normally allocate resources are absent. 재화들이 가격을 가지지 않으면, 정상적으로 자원을 배분하는 시장의 힘이 작동하지 않는다. The private market may fail to provide the socially efficient quantity of such goods. 사적 시장은 이러한 재화들을 사회적으로 효율적인 양만큼 제공할 수 없다. 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. 만약 어떤 사람으로 하여금 어떤 재화를 사용하지 못하게 막을 수 있다면 그 재화는 배재성이 있는 재화이다. 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. 만약 한 사람이 어떤 재화를 사용하는 것이 다른 사람의 사용을 저해한다면 그 재화는 소비의 경합성이 있는 재화이다. 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 그림 11.1 참조 Using the two characteristics on the preceding slide, we can classify most goods in one of the four categories on this slide. As each example displays, explain why it belongs to its category/classification. E.g., food is a private good because: 1) It is excludable: you cannot have any unless you buy it. 2) It is rival in consumption: if you eat that fish taco, I won’t be able to eat it. PUBLIC GOODS AND COMMON RESOURCES 4

A C T I V E L E A R N I N G 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. This brief exercise gives students practice applying the definitions of rival and excludable and the four different types of goods. Suggestion: Tell students they have 1-2 minutes to formulate an answer, then another 2 minutes to compare their answer with that of one student sitting near them. Then ask for students to volunteer their responses. If you’re pressed for time, you can safely omit this exercise. Students can get this information from a careful reading of the chapter. 5

A C T I V E L E A R N I N G 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 6

The Different Kinds of Goods This chapter focuses on public goods and common resources. 이 장은 공공재와 공유자원에 집중 For both, externalities arise because something of value has no price attached to it. 두 경우 모두 외부효과가 발생. 왜냐하면 가치를 가진 무엇인가가 가격을 갖지 않기 때문에. So, private decisions about consumption and production can lead to an inefficient outcome. 따라서 소비와 생산에 관한 사적 결정은 비효율적인 결과를 낳는다. Public policy can potentially raise economic well-being. 공공정책은 이 경우에 경제적 후생을 증대시킬 수 있다. PUBLIC GOODS AND COMMON RESOURCES 7

Public Goods Public goods are difficult for private markets to provide because of the free-rider problem. 공공재가 사적 시장에서 제공되기 어려운 것은 무임승차자 문제 때문이다. Free rider: a person who receives the benefit of a good but avoids paying for it 무임승차자란 어떤 재화를 소비하여 이득을 보았음에도 이에 대한 대가의 지불을 피하는 사람을 말한다. If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good. 만약 재화가 배재 불가능하다면 사람들은 무임승차자가 되려는 유인을 갖는다. 왜냐하면 기업들이 대가를 지불하지 않은 사람들이 그 재화를 소비하지 못하도록 막을 수 없기 때문이다. Result: The good is not produced, even if buyers collectively value the good higher than the cost of providing it. 결과적으로 생산되지 않는다. 비록 그것의 비용보다 구매자들이 부여하는 가치가 크더라도. The textbook exposits these ideas using a simple example – a fireworks display in Smalltown, U.S.A. The Study Guide offers another example, in which the cost of installing a streetlight in a neighborhood is less than the collective benefits of the people who live on that street – yet, no one takes the initiative to provide it. 8

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. 만약 공공재의 편익이 그것을 제공하는 비용보다 크다면 정부가 그 재화로부터 편익을 얻는 사람들에게 조세를 부과하여 그것을 재원으로 그 재화를 제공할 수 있다. Problem: Measuring the benefit is usually difficult. 문제는 편익을 측정이 대개는 어렵다는 점이다. Cost-benefit analysis: a study that compares the costs and benefits of providing a public good 공공재 제공의 비용과 변익을 비교하는 연구를 비용편익분석이라고 함 Cost-benefit analyses are imprecise, so the efficient provision of public goods is more difficult than that of private goods. 비용편익분석이 부정확하므로 공공재의 효율적인 제공은 사적 재화에 비해 더 어렵다. PUBLIC GOODS AND COMMON RESOURCES 9

Some Important Public Goods National defense Knowledge created through basic research Fighting poverty PUBLIC GOODS AND COMMON RESOURCES 10

Common Resources Like public goods, common resources are not excludable. 공공재와 마찬가지로 공유자원도 배재불가능하다. Cannot prevent free riders from using 무임승차자가 사용하는 것을 막을 수 없고 Little incentive for firms to provide 기업이 제공할 인센티브가 거의 없으므로 Role for govt: seeing that they are provided 제공하는 것은 정부의 역할이 된다. Additional problem with common resources: rival in consumption 공유자원의 또 다른 문제는 소비에서의 경합성 Each person’s use reduces others’ ability to use 각 사람들의 사용은 다른 사람들의 사용가능성을 감소시킨다. Role for govt: ensuring they are not overused 정부의 역할은 그것들이 과잉사용되지 않게 하는 것 PUBLIC GOODS AND COMMON RESOURCES 11

The Tragedy of the Commons 공유자원의 비극 A parable that illustrates why common resources get used more than is socially desirable. 공유자원이 사회적으로 바람직한 수준보다 과잉사용되는 이유을 보여주는 우화 Setting: a medieval town where sheep graze on common land. 공유지에서 양이 풀을 뜯는 중세 마을 As the population grows, the # of sheep grows. 인구가 늘자 양의 수도 늘어남 The amount of land is fixed, 땅의 크기가 고정되어 있으므로 the grass begins to disappear from overgrazing. 양들이 너무 뜯어먹어서 풀이 사라지기 시작함 The private incentives (using the land for free) outweigh the social incentives (using it carefully).사적 유인(공짜로 땅을 사용)이 사회적 유인(조심해서 사용)을 압도 Result: People can no longer raise sheep. 결과적으로 누구도 양을 키울 수 없게 됨 12

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. 비극은 외부효과 때문이다. 누군가의 양떼가 공유지에서 풀을 뜯도록 허용하는 것은 그 땅이 다른 사람들에게 갖는 질(유용성)을 감소시키는 것이다. People neglect this external cost, resulting in overuse of the land. 사람들이 이러한 외부 비용을 무시하면 토지의 과잉사용을 결과하게 된다. PUBLIC GOODS AND COMMON RESOURCES 13

A C T I V E L E A R N I N G 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. If you’re pressed for time, you can safely omit this exercise. Its contents will be covered in a subsequent slide, and students can learn this material from a careful reading of the chapter. This exercise has several objectives: 1) It gets students to anticipate the policy solutions to the common resource problem based on what they have just learned about the problem. 2) After giving students a big hint on the preceding slide, it tests to see whether they make the connection between the common resource problem and the policies to deal with negative externalities they learned in the preceding chapter. To get through this activity quickly, display the question, give students a quiet moment to formulate their responses, then ask for students to share their answers. If you can spare an extra couple of minutes, have them work in pairs – two minutes should suffice – and then ask students to share their answers with the class. 14

A C T I V E L E A R N I N G 2 Answers Impose a corrective tax on the use of the land to “internalize the externality.” Regulate use of the land (the “command-and-control” 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. All of these policy options have been used in modern times to deal with the common resource problem. The following slide shows a few examples. 15

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 The electromagnetic frequency spectrum is a common resource. It is not excludable: anyone with the right equipment can use it. It is rival in consumption: there’s a limited amount of spectrum available. The U.S. FCC has been auctioning licenses to use parts of the spectrum since 1994. These auctions raise substantial revenue for the federal government, and help allocate spectrum efficiently (firms that can use it most productively bid the most in the auctions). PUBLIC GOODS AND COMMON RESOURCES 16

Some Important Common Resources Clean air and water Congested roads Fish, whales, and other wildlife Regarding congested roads: please encourage your students to read the new “In the News” box entitled “A Solution to City Congestion.” PUBLIC GOODS AND COMMON RESOURCES 17

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 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! “Spam” email is named after everyone’s favorite delicacy. This case study is not in the textbook. PUBLIC GOODS AND COMMON RESOURCES 18

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 19

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. 20

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. 21

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. 22