ECO1104 - Public Goods and common Resources

ECO1104 Public Goods and common Resources Part 1: We can define or classify most of the goods that we have in our economy. Most of the goods that we have in our economies are private goods and they are excludable and rival. Rival: not available for somebody else if it's consumed by you. The market doesn't work well for allocating public goods and common resources because we have market failures due to the Free-rider problem and the Tragedy of the commons. We can also find the free-rider problem when we are doing teamwork and this is something that all of us have experienced at least once in our life, so you are in a group, specially when the team is larger, then it has a higher chance of happening that one person takes advantage of the situation and let's all the others do the work. The government can decide to offer and finance University but not because it's a public good it's because it has positive externalities. It's a different reason for why we can have government intervention. We're going to define private and public according to non-rival, rival and excludable, non-excludable in this course in economics. The second problem is the tragedy of commons, we have said that when we have common resources, so they are not public, like wildlife, fisheries, oceans, forest... because even if they are not excludable they are rivals. The problem is that when we have a common resource since we cannot exclude people, there's going to be a higher demand and the good is rival. Example if you pollute the ocean it becomes not clean for somebody else. This causes the tragedy of commons a reduction,
destruction or extinction of this common resource due to individually rational but collectively inefficient inefficient overconsumption. Part 2: Because of the tragedy of commons Individuals today might have incentive to contribute to the public good in a quantity lower than the efficient quantity that they should provide and then we're going to end up with an under supply because the total revenue that has been collected to finance the public good is lower than expected. (problem of the free- rider) On the other hand, when we have public goods, common resources, what we have seen is that we have the tragedy of commons. Basically what it means is since we can not exclude anyone from accessing this common resource, this good or service that it's a common resource but also rival. So from the individual point of view it's efficient to consume as much as possible, because initially it seems that the price is 0, but from the collective point of view there's a negative externality because if individuals are consuming too much and that generates external costs that are not taken into account when taking an individual decision. Social Norm it's a kind of agreement, rule that if something happens you are going to receive this social pressure that forces you to do it. It gives incentive to behave. The social disapproval feature is stronger because people don't want to lose their social capital that is important because it's basically all these kinds of relationships that help you in society to access resources and whatnot. In small communities the social capital is more important.
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