At this point in the course, I have to introduce a couple of properties of economic goods that we have not talked about. These two properties can be called "rivality" and "excludability."
"Rivality" refers to how many people can use a good. A good is called a "rival" good if it can only be used by one person, or one group of persons at a time, and the use of the good by that person makes use by another person impossible. So, a Big Mac is clearly a rival good - if I eat it, you cannot. On the other, cable television is a non-rival good. One person using cable TV does not stop another person from using it. A movie ticket could be a rival or non-rival good. If there have been 100 tickets sold to see a movie in a 500-seat theater, then the 101st ticket is not a rival good, because the consumption of that ticket does not stop anybody else from seeing the movie. On the other hand, if the theater owner has sold 499 tickets, the 500th and last ticket will be a rival good.
"Excludability" refers to the ability to stop somebody from consuming a good if they have not paid for it. If we assume for a minute that theft is not occurring, it is easy to see that excluding people from consuming Big Macs if they have not paid for them is easy. However, it can be difficult for other things. Every year on July 4th, I used to sit in the parking lot of the local Wal-Mart and watch the spectacular fireworks display put on at Longwood gardens in Kennett Square, PA. If I wanted to go into Longwood Gardens to watch, I would have to pay \$30 or more, but by sitting outside the grounds, I get to see the fireworks for free.
So we have two variables: rivality and excludability. We can draw a little 2 by 2 table, and see what we get when these properties intersect:
|Rival good||Non-rival good|
|Excludable good||Private goods||Club goods|
|Non-excludable good||Common pools||Public goods|
So, given that we have two variables and each of these two variables has two states, we end up with 2 x 2 = 4 possible outcomes, which are defined in Table 8.1 above.
The quadrant labeled "private goods" refers to goods that are rival and excludable. This quadrant includes the vast majority of economic goods, and does not present us with any serious problems. Because they are excludable, we can assume that property rights are well-defined and are operable.
The other type of excludable good, the club good, refers to the other case where property rights enable the exclusion of non-payers. This includes things like movie theaters, golf and country clubs, cable TV, and so on. Once again, these do not present us with any serious economic issues.
Moving on to the second row of the table is where we run into some interesting issues. If a good is both non-rival and non-excludable, it is what we refer to as a public good. This is a good where it is difficult to exclude people who do not pay, but whose use of the good does not impede others from using it. The city streets are typically public goods: when I was in State College, I could drive from my apartment to campus without having to pay to use the roads, at least directly. Of course, parking is another issue, but let's not talk about that here...:-)
Public goods can be thought of as a type of market failure. Individual economic actors have incentives to under-pay - this is what is referred to as the "free-rider" problem. The price paid is usually lower than the costs of supply - quite often there is no price, as people are not forced to pay the market-clearing price which would be defined by "marginal cost = marginal benefit".
Subsequently, there is a shortage of supply. Users derive great utility from consuming the public good, but nobody can profit from operating a public good, so there is no market-based, self-interested incentive in a person or group of persons providing the good.
Let’s use National Defense to illustrate: suppose Americans are expected to pay for national defense through voluntary donations to the Department of Defense. Since I cannot be excluded from the benefits of national defense, I have incentives to not “donate” any money while still being protected. You (and everybody else) face the same incentives, so no one will voluntarily pay. So, left to this state of affairs, the Pentagon would have to defend us with imaginary weapons (and imaginary soldiers, too)!
This is why taxes are not voluntary.
The above scenario is true for all public goods; there will be less supply than the socially optimal quantity because people will pay less than what the good is actually worth to them, due to the free rider problem. To correct the situation, a central agency which can mandate payment (i.e., the government) provides the good. This is generally held to be a desirable outcome because, this way, the right amount of a public good is supplied - if we assume that government is able to define the optimal quantity of a public good. We will talk about this more in the next lesson when we introduce the concept of government failure.
Of course, with an election approaching, a large debate has arisen as to "how much" of a large number of public goods should be provided, but that is a political issue that is beyond the scope of this course.
In the above case, the government has assumed the property right for the public goods.
Now, we will look at the last of the four quadrants in the table above, the common pool, sometimes referred to as "common property resources."
Common property resources are defined by 3 characteristics:
- Non-Exclusive Property Rights
- No one person owns the resource.
- No one can be kept from consuming the resource.
- Free Access
- Everyone has unrestricted access.
- Access is easily attainable (relative to the value of the resource).
- Rationing of the common pool good via "first-come, first-served," as opposed to the usual form of rationing in a market: rationing by price.
As a result of these characteristics, exploitation - overuse - usually results. A common pool presents a problem, in that nobody who uses a common pool has an incentive to consume less today and save some for tomorrow. If you chose to defer consumption of a good to tomorrow, then somebody else will come in and consume it today. Therefore, it is in your best interest to consume extra today. When many people behave like this, the common pool will be exhausted very quickly. Some common examples:
- Endangered Species
- Water Resources
- In general, non-infinite renewable resources on non-private land
Let us focus on a particular issue which has aroused a lot of concern lately, that being the notion of overfishing. The basic problem is that fish in the wild are not owned (non-exclusive property rights) until they are captured, at which point they are dead and, hence, unable to reproduce. A lot of fishing is complicated by the fact that a lot of fish exist and are caught in what are called "international waters," which are typically any oceans more than 12 miles from the coast of any nation.
Given a certain population of fish, it is possible for humans to consume a certain amount of fish in a given year, and the fish in the ocean will breed and reproduce, allowing the quantity of fish in the ocean to stay more or less constant. However, if we catch too many fish today, then the population remaining in the sea will not be able to generate enough offspring to replenish the stock, and the quantity of fish in the sea will shrink over time. Eventually, it will become extinct. Clearly, mankind as a collective entity has an incentive to not over-fish today, to ensure that enough fish in the sea will remain to allow us to consume fish for the rest of time. Unfortunately, very few individuals face the same incentive privately. Catching more fish today means more profit today, and if I were to catch fewer fish, it is likely that someone from another ship will come and catch any fish that I am trying to "conserve," because I do not have any property rights to fish in the wild.
How do we solve this problem? The common answer to this is to grant property rights to the pool. Then, when somebody owns the pool, they have an incentive to preserve some of it for tomorrow. This is why cows are not in danger of becoming extinct – all cows are owned by somebody. African elephants were in danger of going extinct because nobody owned elephants, and people would kill them for ivory. In southern Africa, elephants have been converted to private property, and the population is growing. Note that the Indian elephant has never been at risk of extinction, because in India elephants are working animals that are owned by people.
Returning to the example of fish, there was a great source of fish in the North Atlantic known as the "Grand Banks," a warm shallow area off the coast of Newfoundland in Canada. The history of the Grand Banks is described at the following link in more detail than I can cover here, so I urge you to read it. Although it is an "environmentalist' magazine, and is thus written from a certain point of view, it is generally a good rundown of the facts.
Thompson, Tim. (1987). A Run on the Banks, How "Factory Fishing" Decimated Newfoundland Cod, Emagazine.com
The bottom line is, a common-pool problem existed, which the government of Canada solved by extending their territorial waters from 12 miles to 200, and then by requiring licenses to fish at a level that was felt to be sustainable. Perhaps it was too late in this case, and many people believe that the North Atlantic cod stocks are gone forever. Nonetheless, this is a good illustration of how other countries have striven to address the common pool issue - a number of countries have extended their stewardship over marine life and limited harvests in order to ensure sustainability and an adequate supply for future generations.