Chapter 17: Public Goods and Common Resources

The framework begins with two key dimensions for classifying goods: excludability, which determines whether nonpayers can be prevented from accessing a good, and rivalry in consumption, where one individual's use diminishes what remains available for others. Public goods such as national defense and lighthouses are nonexcludable and nonrival, meaning that once provided, everyone benefits regardless of payment and consumption by one person does not reduce availability to another. This combination creates the free-rider problem, where rational individuals benefit from provision without contributing financially, leading markets to underproduce these goods below socially efficient levels. Common resources including fisheries, forests, and groundwater deposits present the opposite challenge: they are nonexcludable but rival, creating a tragedy of the commons scenario where open access encourages excessive extraction and depletion without coordinating mechanisms or enforcement. A third category, artificially scarce goods such as digital content and subscription services, are excludable yet nonrival, presenting opportunities for monopoly pricing and underutilization. The chapter evaluates how government intervention through direct provision funded by taxation can achieve efficient supply of public goods, while regulation, tradable quotas, or assignment of property rights can control common resource overuse. Cost-benefit analysis emerges as a practical framework for determining whether public good provision yields total social benefits exceeding total social costs. The discussion integrates real-world applications including air quality standards, public transportation infrastructure, broadcast television, and road network management to illustrate how market failures in these domains necessitate collective action and institutional design that align individual incentives with broader societal welfare objectives.