Law for Business

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AP Economics
Mr. Bernstein
Module 76:
Public Goods
January 8, 2015
AP Economics
Mr. Bernstein
Public vs Private Goods
• Private Goods
• Excludable - Suppliers can prevent those who don’t pay
from consuming
• Rival – Cannot be consumed by more than one person
at the same time
• Public Goods
• Non-excludable and non-rival
• Example of Public Good: Fire Department (nonrival, benefits neighbors as well as burning house)
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AP Economics
Mr. Bernstein
Common and Artificially Scarce Resources
• Common Resources
• Non-excludable but rival
• ie fish in the ocean…anyone can catch them but only
one person at a time can consume
• Artificially Scare Resources
• Excludable but non-rival
• Pay-per-view movies
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AP Economics
Mr. Bernstein
Public, Private, Common and Artificially Scarce
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AP Economics
Mr. Bernstein
Markets Only Provide Private Goods Efficiently
• Freeloader problem
• Efficient level of
Public Good is where
MSC = MSB
• Variation of MC = MR
• MSB is sum of individual
MSB curves
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AP Economics
Mr. Bernstein
Common Resources
• Example: Well water
• Nonexcludable, rival
• “Tragedy of Commons” (1968)
• User imposes very small cost to society so individual
will overuse
• Solutions include tax or regulate users, system of
tradable licenses, or otherwise making resource
excludable and assigning rights (ie logging Public Lands)
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AP Economics
Mr. Bernstein
Common Resources
• S is sum of individual
supply curves
• Does not include cost
imposed on others
• As a result, MSC lies
above S
• Equilibrium is higher
than optimal (MSC=D) point
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AP Economics
Mr. Bernstein
Efficient Level of Artificially Scarce Goods
• Example: Pay Per View (On Demand)
• Excludable, nonrival
• MC ~ = zero
• So the efficient quantity is where Demand curve
intersects MC = 0 line…
• But there is no profit there, so firm excludes some
customers by charging $5 to view and quantity ordered
is less than efficient quantity
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