summary of chapter 10, Sintesi del corso di Economia Internazionale

Scarica summary of chapter 10 e più Sintesi del corso in PDF di Economia Internazionale solo su Docsity! Cap. 10 PUBLIC GOODS AND COMMON RESOURCES The public sector refers to the provision of goods and services which are funded and organized by the state on behalf of the population as a whole. This contrasts with the private sector where goods and services are funded and organized by private firms, usually, but not exclusively, with a view to making a profit. public sector that part of the economy where business activity is owned, financed and controlled by the state, and goods and services are provided by the state on behalf of the population as a whole private sector that part of the economy where business activity is owned, financed and controlled by private individuals THE DIFFERENT KINDS OF GOODS In thinking about the various goods in the economy, it is useful to group them according to two characteristics: Is the good excludable? Can people who do not pay for the use of a good be prevented from using the good? Is the good rival? Does one person’s use of the good diminish another person’s ability to use it? excludable the property of a good whereby a person can be prevented from using it when they do not pay for it rival the property of a good whereby one person’s use diminishes other people’s use Using these two characteristics, we can divide goods into four categories:  Private goods are both excludable and rival. Consider a chocolate bar, for example. A chocolate bar is excludable because it is possible to prevent someone from eating the bar – you just don’t give it to them.  Public goods are neither excludable nor rival. People cannot be prevented from using a public good, and one person’s use of a public good does not reduce another person’s ability to use it. For example, a country’s national defense system.  Common resources are rival but not excludable in consumption. When one person catches fish, there are fewer fish for the next person to catch. Yet these fish are not an excludable good because, given the vast size of an ocean, it is difficult to stop fishermen from taking fish out of it when, for example, they have not paid for a licence to do so.  Club goods are excludable but not rival in consumption. Consider fire protection in a small town. It is easy to exclude people from using this good if people chose not to pay: the fire service can just let their house burn down. Yet fire protection is not rival in consumption. Fire fighters spend much of their time waiting for a fire, so protecting an extra house is unlikely to reduce the protection available to others. private goods goods that are both excludable and rival public goods goods that are neither excludable nor rival common resources goods that are rival but not excludable club goods goods that are excludable but non-rival in consumption For both public goods and common resources, a cost or benefit arises because something of value has no price attached to it. If one person were to provide a public good, such as a national defence system, other people would be better off, and yet they could not be charged for this benefit. Similarly, when one person uses a common resource, such as the fish in the ocean, other people are worse off, and yet they are not compensated for this loss. PUBLIC GOODS To understand how public goods differ from other goods and what problems they present for society, let’s consider an example: a firework display. This good is not excludable because it is impossible to prevent someone from seeing fireworks, and it is not rival because one person’s enjoyment of fireworks does not reduce anyone else’s enjoyment of them. The free rider Problem Conchita, a Hereza entrepreneur, decided to put on a firework display. Conchita may have trouble selling tickets to the event because her potential customers would quickly figure out that they could see the fireworks even without a ticket (unless Conchita could figure out a way in which she could keep the display ‘private’ somehow). Because fireworks are not excludable, people have an incentive to be free riders. A free rider is a person who receives the benefit of a good but avoids paying for it. free rider a person who receives the benefit of a good but avoids paying for it Some Important Public goods There are many examples of public goods. Here we consider three of the most important. National defence The defence of the country from foreign aggressors is a classic example of a public good. Once the country is defended, it is impossible to prevent any single person from enjoying the bene- fit of this defence. Moreover, when one person enjoys the benefit of national defence, they do not reduce the benefit to anyone else. Thus, national defence is neither excludable nor rival. Basic research The creation of knowledge is a public good. It is important to distinguish general knowledge from specific, technological knowledge. Fighting Poverty Many government expenditure programmes are aimed at helping the poor. Economists disagree among themselves about what role the government should play in fighting poverty. Here we note one important argument: advocates of anti-poverty programmes claim that fighting poverty is a public good. Suppose that everyone prefers to live in a society without poverty. Even if this preference is strong and widespread, fighting poverty is not a ‘good’ that the private market can provide. No single individual can eliminate poverty because the problem is so large. Moreover, private charity is hard pressed to solve the problem: people who do not donate to charity can free ride on the generosity of others. In this case, taxing the wealthy to raise the living standards of the poor can make everyone better off. The poor are better off because they now enjoy a higher standard of living, and those paying the taxes are better off because they enjoy living in a society with less poverty and the associated problems that can arise because of poverty – crime, drug abuse, mental illness and so on. The difficult Job of Cost-benefit analysis So far, we have seen that the government provides public goods because the private market on its own will not produce an efficient quantity. Yet deciding that the government must play a role is only the first step. The government must then determine what kinds of public goods to provide and in what quantities. Suppose that the government is considering a public project, such as building a new motorway or auto- bahn. To judge whether to build the motorway, it must compare the total benefits of all those who would use it to the costs of building and maintaining it. To make this decision, the government might hire a team of economists and engineers to conduct a study, called a cost-benefit analysis, the goal of which is to estimate the total costs and benefits of the project to society as a whole. cost-benefit analysis a study that compares the costs and benefits to society of providing a public good COMMON RESOURCES Common resources, like public goods, are not excludable: they are available free of charge to anyone who wants to use them. Common resources are, however, rival: one person’s use of the common resource reduces other people’s ability to use it. Thus, common resources give rise to a new problem. Once the good is provided, users and policymakers need to be concerned about how much it is used. This problem is best understood from the classic parable called the Tragedy of the Commons, a term used by Garrett Hardin in an essay published in 1968. Tragedy of the Commons a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole Some Important Common resources Examples of common resources. Clean air and Water Pollution is a social cost that can be remedied with regulations or with taxes on polluting activities. Clean air and clean water are common resources like open grazing land, and excessive pollution is like excessive grazing. Congested roads can be either public goods or common resources. If a road is not congested, then one person’s use does not affect anyone else. In this case, use is not rival, and the road is a public good. Yet if a road is congested, then use of that road yields a social cost. When one person drives on the road, it becomes more crowded. Fish, Whales and other Wildlife Many species of animals are common resources. Fish and whales, for instance, have commercial value, and anyone can go to the ocean and catch whatever is available.