Step 23: Public Goods and Common Resources

Two questions that sort every good

A café sandwich, the streetlight outside your house, fish in a nearby lake and your Netflix account behave very differently. Two questions explain why.

Question 1: can people who don’t pay be kept out? The café will not give you a sandwich unless you pay. But nobody can stop you walking under a streetlight.

Question 2: does one person’s use leave less for everyone else? If you eat the sandwich, nobody else can. But your walking under the streetlight does not make it any dimmer for your neighbour.

Put the two questions together and you get four categories:

Club goods can be provided privately, but they may be underused: one more user costs almost nothing, so any price above zero keeps out some people who would benefit.

Public goods and the free-rider problem

Imagine your street wants a new streetlight. A neighbour knocks on doors asking for contributions. You think: “If the others pay, the light goes up and I get it free. If they don’t, my money alone won’t be enough.” Either way, keeping your money looks smart. If everyone thinks this way, the light never gets built, even though everybody wants it.

This is the free-rider problem. Because a public good is non-excludable, people can enjoy it without paying, so few pay voluntarily. A private firm cannot make money from it, so the market provides too little or nothing at all. That is why national defence, police, courts and flood barriers are provided by governments and paid for with compulsory taxes.

A public firework display is another example: anyone nearby can watch, and one more viewer spoils nothing, so big displays are usually publicly funded or sponsored.

How much of a public good is efficient?

For an ordinary private good, you find market demand by adding up quantities at each price (horizontal summing), because each person buys their own amount. With a public good, everyone consumes the same quantity at the same time: the whole town shares one park. So the value of one more unit is the sum of what everyone is willing to pay for it. You add demand curves vertically.

Common resources and the tragedy of the commons

Common resources have the opposite problem from public goods. Instead of too little, we get too much use. They are rivalrous (every fish caught is one fewer for others) but non-excludable (nobody can be stopped from fishing).

Hardin described a shared pasture. A herder who adds a cow keeps all the extra milk and meat, but the overgrazing damage is shared, so every herder keeps adding cows until the pasture is ruined.

You can see the same pattern in overfishing, deforestation, groundwater being pumped faster than it refills, traffic congestion (each driver slows everyone else down) and climate change, where the atmosphere is the shared resource.

The collapse of Atlantic cod off Newfoundland, Canada, is the textbook case. For centuries the fishery was one of the richest in the world, but industrial trawlers from many countries overfished it. By 1992, stocks had fallen to about 1% of their historical level. Canada banned cod fishing, closing a $500 million industry and putting 40,000 people out of work. More than 30 years later, the stocks have only partly recovered.

Three ways to stop the tragedy

1. Government regulation. Laws limit use: fishing quotas, logging permits, hunting seasons, congestion charges. London’s congestion charge (introduced in 2003) cut traffic in central London by about 30%. Charging for road space turns it into something closer to an excludable good.
2. Property rights. If someone owns the resource, they have a reason to look after it. Iceland gives fishing firms Individual Transferable Quotas (ITQs): tradable shares of the total allowed catch. Fish stocks have recovered significantly since the system began in the 1980s. This is the Coase approach from Step 16 applied to a common resource.
3. Community management. Elinor Ostrom (Nobel Prize 2009) showed that local communities can manage commons well without either privatisation or top-down rules. Examples include irrigation in Nepal, lobster fishing in Maine and forests in Japan. Success needs clear boundaries, rules that fit local conditions, shared decision-making, monitoring, sanctions that increase step by step for rule-breakers, and easy ways to settle disputes.

Practise: 6 questions

Try each one on paper first, then check the worked answer.

Check yourself

The short version

• Two questions, about excludability and rivalry, sort goods into private goods, public goods, common resources and club goods.
• Public goods suffer from free-riding, so markets under-provide them; governments fund them through taxes.
• For public goods, sum individual demand curves vertically and set \( MSB = MC \) to find the efficient quantity.
• Common resources are overused (the tragedy of the commons), as the Atlantic cod collapse showed.
• Fixes for the commons are regulation, property rights (ITQs) and community management (Ostrom), ideally before the damage is done. The full chapter in Economics Made Simple has 15 exam-style questions with complete answers.