Public Goods and Bads, Open Access, and Shared Resources
Analyzing goods and services in terms of their rivalry and excludability
helps us determine their optimum allocation. Read this short text on a 2
× 2 matrix to classify goods according to this criteria.
Classifying Goods
We have discussed many examples of private goods: loaves of bread, clothing, a lottery prize divided between Zoë and Yvonne, and boxes of breakfast cereal. Private goods are both rival (more for Zoë means less for Yvonne) and excludable (Zoë can prevent Yvonne from taking her money).
Some forms of knowledge can be subject to intellectual property rights, such as a patent or copyright, which limits the ways it can be exploited for a period of time.
At the other extreme are what are sometimes called pure public goods, like national defense or knowledge, which are entirely non-rival (the marginal cost of an additional consumer is zero) and non-excludable (it is impossible to exclude people from their benefits).
Goods are sometimes classified according to rivalry and excludability in a 2 × 2 matrix. But the true picture is more complicated: the extent of rivalry or excludability in goods is a matter of degree. Some goods are rival in some circumstances but not in others. Excludability varies with governance and the legal system and with technology; even if feasible, it is not necessarily used or desirable.
In Figure 10.9, we have classified some of the goods discussed in this section. The excludability row includes goods for which exclusion is possible in principle, even if – as in the case of public roads and parks – it is rarely used. The intermediate column includes the many important goods that are rival in some circumstances, but not all.
| Rival | Partially Rival | Non-Rival | |
|---|---|---|---|
| Excludable (exclusion is feasible, although it may not always be used) | Private goods: food, clothes, houses, etc. |
Privately owned resources such as parks, forests, fishing lakes,
sports clubs, football matches, art galleries, theatres, and cinemas. Public amenities such as parks, libraries, swimming pools, and sports facilities; public roads and highways; public transport services (sometimes called congestible public goods) |
Excludable public goods (sometimes called club goods) R&D (patents), books, art and design (copyright), broadcasting, streaming of music and film, online resources such as journalism, open-source software, and CORE Econ's The Economy |
| Non-excludable | Depletable open-access mineral resources in international waters or the Antarctic | Exploitation of ocean fish stocks and other wild plant and animal species, and of some wild areas including rainforest; common land (non-excludable to those with commoners' rights) | Pure public goods: national defense; street lighting; knowledge (for example, the rules of arithmetic); renewable sources of power: solar, wind, tides |
Figure 10.9 Rivalry and excludability.
Analyzing goods in terms of their rivalry and excludability helps us to determine how they can be allocated most efficiently. Markets typically allocate private goods (although where there is little competition, the allocation is unlikely to be Pareto efficient).
Otherwise:
- When goods are non-rival, the marginal cost is zero: Setting a price equal to marginal cost (as is necessary for a Pareto-efficient market transaction) will not be possible unless the provider is subsidized.
- If non-rival goods are also excludable, market provision may be possible, although the allocation is unlikely to be Pareto efficient.
- When goods or resources are not excludable, there is no way to charge a price for them: Produced goods will not be privately provided, and resources will be overused.
So when goods are not private, public policy may be required to allocate them. National defense is the responsibility of the government in all countries. Environmental policy addresses problems of common-pool resources and public bads such as pollution and carbon emissions. Governments also adopt a range of policies to address the problem of knowledge as a public good, such as issuing patents to give firms an incentive to undertake research and development (R&D)
Although we have focused on non-rivalry and non-excludability in this section, all of the problems associated with public goods and shared resources can be interpreted in terms of external effects - where decision-makers don't take into account the full social marginal costs and benefits of their actions. Figure 10.10 summarizes the features of some of the examples we have discussed in this and the previous section using the same framework as in Figure 10.6.
| Decision | The external effect: how it affects others not included in the contract | Costs and benefits | Misallocation of resources (market failure) |
Possible remedies (full or partial) |
Terms applied in this situation |
|---|---|---|---|---|---|
| A firm broadcasts a radio program | Listeners can enjoy the program | Private cost External benefit |
Too few programs and/or too few listeners (if some are excluded by the price) | Public provision, public subsidy, advertising | Public good, positive external effect, non-rivalry, excludability |
| A firm invests in R&D | Other firms can exploit the innovation | Private cost External benefit |
Too little R&D | Publicly funded research, subsidies for R&D, patents | Public good, non-rivalry, positive external effect, free-riding |
| You use fossil fuels to heat your house | Carbon emissions | Private benefit External cost |
Too much atmospheric CO2 causing global warming | Carbon taxes, regulation, quotas | Global public bad, negative external effect |
| A fishing boat catches cod in international waters | Fewer fish for other boats | Private benefit External cost |
Overfishing: depletion of cod stocks | Regulation, quotas | Open-access resource, negative external effect, depletable resource, tragedy of the commons |
| You go to a crowded swimming pool | Increased congestion | Private benefit External cost |
Overuse of the pool | Entry or membership fee | Shared resource, excludable public good, club good, artificial scarce resource, negative external effect |
Exercise 10.9 Rivalry and Excludability
For each of the following goods or bads, decide whether they are rival and whether they are excludable, and explain your answer. If you think the answer depends on factors not specified here, explain how.
- A free public lecture held at a university lecture theatre
- Noise produced by aircraft around an international airport
- A public park
- A forest used by local people to collect firewood
- Seats in a theatre to watch a musical
- Bicycles that are available to the public to hire to travel around a city.
Question 10.5
Choose the correct answer(s)
Read the following statements and select the correct option(s).
1. Some public goods are rival.
2. A public good must be non-excludable.
3. A good cannot be rival and non-excludable.
4. If a good is non-rival, then the cost of an additional person consuming it is zero.
Source: CORE Econ, https://core-econ.org/the-economy/microeconomics/10-market-successes-failures-07-open-access-shared-resources.html#classifying-goods
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