Chapter 11 Summary

Chapter 11 deals with a completely new idea: that of goods that one does not pay for using--that is, public goods and common resources. It introduces 2 major ideas: excludability and rivalry in consumption. Excludability refers to whether or not someone can be prevented from using a good, and rivalry in consumption refers to whether or not one person's use of a good decreases another person's potential benefit from that good. This allows for goods to be divided into 4 categories: private (excludable and rival), such as ice cream cones; public (non-excludable and non-rival), such as national defense; common resources (non-excludable and rival), such as fish in the ocean; and goods characterized by natural monopolies (excludable and non-rival), such as fire protection in a small town. Public goods, such as fireworks displays, can be beneficial and efficient to do; however, because of free riders (people who see the fireworks but don't pay) it is impossible for a private firm to profit from providing the good. Free riders are essentially a positive externality, and the government can subsidize a show. Examples of public goods include national defense, basic research, anti-poverty programs, and others. However, it can be difficult to determine whether the cost or benefit of these goods is greater and therefore whether it is efficient to produce them, since there is no market to regulate prices. Therefore, the government has to do cost-benefit analyses. Common resources, because they are non-excludable but rival, suffer from the tragedy of the commons: without regulation, they will be overused. This is because of the negative externality created on other users by each user of the resource.