Chapter 17: Public Goods and Common Resources

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Imagine stepping into London back in 1858.

Not the London you might picture today, all charming and historic.

No, this was a city literally choking on its own waste.

You had two and a half million people and pretty much all their sewage.

It flowed straight into the River Thames.

And the Thames was where many Londoners got their drinking water.

Can you even wrap your head around the smell?

It was infamous.

They actually called it the Great Stink.

Seriously.

And it wasn't just the smell.

Awful as that must have been.

It was deadly.

Neighborhoods right along the river had cholera death rates like six times higher than areas further inland.

It was a massive public health crisis unfolding.

Yeah, a total catastrophe.

Now, people knew what needed to be done.

Engineers, reformers, they saw the need for a huge citywide sewage system, you know, divert the waste away.

But there was a lot of pushback against the government getting involved.

Right.

The thinking was, well, private companies should handle this.

Or maybe it just wasn't the government's job.

A problem, sure, but not the state's problem.

Then came the summer of 1858.

Insanely hot.

It just baked the city.

And that smell from the Thames, it got amplified to, well, an unimaginable level.

I read they tried hanging curtains soaked in chemicals over the parliament windows just so the MPs could breathe.

Exactly.

That level of desperation.

That's what finally broke the deadlock.

The Great Stink became impossible to ignore.

Even for parliament.

They finally approved this massive plan for sewers.

And the results were pretty staggering.

The system, designed mainly by Sir Joseph Bezeljet, opened around 1865.

And almost immediately, those horrible cholera and typhoid epidemics that had plagued London for decades, they just vanished.

Wow.

Yeah.

And the Thames itself started to recover.

It eventually became one of the cleanest city rivers in the world.

Bezeljet, the engineer, they estimate his work added something like 20 years to the average Londoner's lifespan.

It's incredibly huge.

It really is.

But okay, let's unpack this.

This isn't just a, you know, a cool history lesson.

This story perfectly sets up why markets sometimes fail.

Why sometimes government stepping in isn't just helpful.

It's, well, essential.

We're talking about two really crucial economic ideas here.

Public goods and common resources.

That's a great point.

And that's exactly what we're diving into today.

The different characteristics of goods.

Understanding this stuff helps explain why some markets work so well.

You know, giving us everything from coffee to cars, while others, like London's sanitation back then, just completely break down.

And for those of you listening, especially if you're prepping for economics courses or exams, this deep dive is definitely for you.

We're going to break down the key terms, the principles, even how to think about the models.

Yeah.

Our goal here is to explore exactly what makes a good private or public, common resource, even artificially scarce and crucially why these labels matter so much for efficiency.

We'll use real examples and clarify why, you know, government often ends up playing a role.

So just to get us started thinking,

what's the real economic difference between,

say, putting a new sink in your house versus building that massive London sewage system, or maybe what makes growing wheat different from fishing out in the open ocean?

They seem simple, but economically they're worlds apart.

Right.

And the difference comes down to two really fundamental characteristics.

Every good has these.

First, is it excludable?

Basically, can the person supplying it stop people who don't pay from using it?

Like putting up a fence or charging admission?

Exactly.

If you buy an apple, the seller can stop someone else from just grabbing it.

That's excludable.

Second, is it rival in consumption?

Meaning, if one person uses the good, does that prevent another person from using the exact same unit?

So if I eat this apple, you can't eat the same apple.

That makes it rival.

Okay, so excludable and rival.

And when a good has both of those qualities.

That's what we call a private good.

Wheat is a perfect example.

A farmer sells it, you pay.

Others can't have that specific bushel.

And if you eat the bread, I can't eat the same loaf.

Like my bathroom sink example.

I buy it, it's mine.

You can't use my sink while I am.

Precisely.

And for these private goods, markets usually work really well.

The incentives just line up nicely.

Producers want to sell, consumers want to buy.

It's efficient.

But not everything fits that mold.

Not at all.

Economists often use this simple two by two grid to visualize the categories.

Think of it like this.

One axis is excludable versus not excludable.

The other is rival versus non -rival.

Okay.

So non -excludable means you can't stop non -payers from consuming it.

Like a public fireworks display.

One says rockets go up, anyone nearby sees them, paid or not.

Right.

And non -rival in consumption means one person using it doesn't stop others from using the same unit.

Like streaming a movie or watching it doesn't prevent me from watching the exact same movie five.

Okay.

Got it.

So the grid helps sort things out.

Exactly.

So private goods, excludable and rival.

Like apples, cars, your sink.

Public goods, these are the opposite.

Non -excludable and non -rival.

Think of that London sewer system.

Once it was built, everyone benefited.

Non -excludable and one person being protected didn't reduce anyone else's protection.

Non -rival.

Common resources.

These are non -excludable, but they are rival.

Like fish in the ocean.

Anyone can try to catch them.

Non -excludable, but the fish I catch is one you can't.

Rival.

Clean air too.

And finally, artificially scarce goods.

These are excludable, but non -rival.

Think on -demand movies, software, digital books.

You pay for access.

Excludable.

But your download doesn't stop mine.

Non -rival.

Okay.

That makes sense.

But why do excludability and rivalry matter so much?

Why do they determine if markets work efficiently or not?

What's the blockage for these other types?

That's the million dollar question.

Let's start with public aid's non -excludable and non -rival.

The London sewer system is our prime example.

Other classics.

National defense.

A strong military protects everyone.

Right.

And my protection doesn't reduce yours.

Basic scientific research, too.

New knowledge benefits everyone.

Disease prevention campaigns.

Same idea.

Okay.

So the problem with things being non -excludable,

that's the free rider problem, right?

Exactly.

Because suppliers can't stop non -payers from enjoying the benefits,

rational self -interested people won't volunteer to pay.

Why would you if you can wait for someone else to pay and you still get the benefit for free?

It's like that classic group project scenario in school.

Perfect analogy.

Some people slack off hoping the others will do the work, but everyone gets the same grade.

They free ride.

And that's why no private company built London sewers.

They couldn't possibly charge every single person who would benefit from cleaner air and water.

Precisely.

No profit motive.

So this free rider issue means you get inefficiently low production or often none at all if left to the private market.

So how do societies actually get these things provided then?

Well, there are a few ways.

None perfect.

Sometimes you rely on voluntary contributions, think donations for medical research, but that's usually not enough for big essential things.

Or you can fund them indirectly, like broadcast TV in the U .S.

is funded by ads.

Right.

But then you get shows designed to sell ads, not necessarily what people might really want.

Plus you have to watch the commercials.

True.

Another way is to try and make them excludable, even if they aren't naturally.

Like the UK's TV license fee, they literally had detector vans driving around.

Seriously.

Oh, yeah.

But the downside there is if you charge a price for something that's non rival, meaning it costs nothing extra to let one more person watch you end up with inefficiently low consumption,

people who'd benefit slightly but less than the B just don't watch.

In small communities, maybe social pressure works like for volunteer fire departments, but for big stuff, the most common and often necessary solution is government provision paid for through taxes, national defense, the legal system, fire departments in big cities,

major infrastructure.

That's why we have government.

OK, so if the government steps in, how do they figure out how much to provide, like how many streetlights or how much military spending?

Is there an efficient amount?

There is theoretically.

The efficient level is where the marginal social benefit of the public good equals its marginal cost.

And here's the absolute key point for public goods.

The marginal social benefit isn't just one person's benefit because it's non rival.

Everyone benefits simultaneously.

So the MSB is the sum of all individual marginal benefits.

So if a streetlight benefits 100 people, you add up what each of those 100 people gains from it.

Exactly.

Let's say we're talking street cleaning.

We need to figure out the benefit of one more cleaning per month.

We'd add up what Theo values it at plus what Abby values it at plus everyone else on the street.

That total is the marginal social benefit.

Now, compare that sum to the say it costs six dollars to clean the street one more time.

As long as the sum of everyone's marginal benefit is six dollars or more, it's sufficient to do it.

If the benefit of the fifth cleaning adds up to eight dollars across everyone, but the benefit of the sixth cleaning only adds up to two dollars, then the efficient number is five cleanings.

Stop before the cost exceeds the sum benefit.

And that also shows why individuals won't pay for it themselves, right?

My personal benefit from that fifth cleaning might only be one dollar, even if the total benefit is eight dollars.

I'm not paying six dollars for a one dollar benefit.

Precisely.

Your individual marginal benefit is way less than the marginal social benefit.

That's the core issue.

You know, this sounds a lot like the logic with positive externalities.

The social benefit is higher than the private benefit.

So the market under provides.

It's a very strong parallel.

Both are market failures where individual incentives don't align with the overall social good leading to under apply.

Now, in practice, governments use something called cost benefit analysis to make these decisions, trying to weigh the costs against the benefits.

Sounds reasonable.

Costs are usually the easier part to figure out.

But benefits, that's really hard.

Think about it.

If you ask people how much they value national defense, they might exaggerate knowing they won't actually get a bill for their stated value.

This could lead to too much government spending.

I see.

On the flip side, if you rely purely on voting, you might get too little.

Voting itself is kind of a public good.

My one vote doesn't change much, so maybe I don't bother free writing again.

That ties into something really relevant today.

Infrastructure.

You hear all the time about crumbling roads, bridges, water systems.

The American Society of Civil Engineers consistently gives U .S.

infrastructure grades like D plus.

That's not good.

It's really concerning.

State and local spending on infrastructure has been historically low.

And you see the results, right?

Trains that are always late, buses that are packed, sometimes even tragic accidents linked to delayed safety upgrades.

Yeah, those stories are awful.

And you can see the funding gaps in reports, the low grades for transportation, schools, waterways.

And this loops right back.

Much of that core infrastructure acts like a public good.

It's often non -excludable, maybe non -rival up to a point.

But because of

The market won't build that bridge for free, just like it wouldn't build the sewers in 1858.

OK, that makes a lot of sense.

So that's public goods, non -excludable, non -rival, leading to free writing and under provision.

Let's switch gears.

What happens with the other categories?

What about things that are non -excludable so you still can't charge people easily?

But they are rival.

My use does diminish yours, like those fish in the ocean or the clean water in the Thames

Right, that's our category of common resources.

Non -excludable, but rival in consumption.

Fish stocks are the classic example.

Clean air and water fit here too.

Biodiversity, even a busy highway during rush hour, you can't easily exclude people.

But each extra car slows everyone else down, making it rival.

OK, so what's the problem there?

If people can't be stopped, but using it, uses it up.

The problem is overuse.

Because you can't charge people, individuals will keep consuming the resource as long as their personal benefit is greater than their personal cost.

They completely ignore the cost they're imposing on others by using up the resource.

When I catch a fish, that's one less fish for you, but I don't really think about that cost to you when I decide whether to cast my line again.

Or when I merge onto a crowded highway,

I'm thinking about getting where I need to go, not the extra five minutes I just cost everyone behind me.

Exactly.

You don't for imposing that delay cost on others.

You know, again, this feels similar.

It sounds a lot like a negative externality.

My action imposes a cost on others that isn't accounted for in the market.

It's almost exactly parallel.

The marginal social cost of using that common resource is higher than the individual marginal cost faced by the user.

Think about a graph for fishing.

You've got a demand curve showing the marginal benefit fishermen get from fish.

You've got a supply curve showing their individual marginal cost, fuel, time, bait.

Fishermen will fish until those two are equal, but the true cost to society, the marginal social cost, is higher because it includes the cost of depleting the fish stock for future catches or for the ecosystem.

So the efficient quantity where marginal benefit equals marginal social cost is actually lower than the quantity the market will arrive at.

The market leads to overuse.

So QMKT is greater than QOPT on the outcome.

And sometimes the consequences are devastating.

Consider the Ogallaw Aquifer, huge underground water source under the Great Plains.

Millions rely on it for drinking water, farmers for irrigation.

Right, I've heard of it.

It formed over like millions of years.

But since the 1950s, because access was largely unrestricted, it was a common resource.

Farmers pumped water for irrigation like crazy.

Now, vast stretches of it are severely depleted.

Wells have gone dry in Kansas, Texas.

Farmland is turning back to dust, and this water isn't coming back quickly.

It could take thousands of years of rainfall to refill in some places.

That's terrifying because nobody owned it, nobody had the incentive to conserve it.

That's the tragedy of the commons, as it's often called.

So how do we fix this problem?

If overuse is the issue for common resources, what are the solutions?

Well, the solutions look a lot like how we deal with negative externalities.

Three main approaches.

One, you can use taxes or regulations.

Charge people for using the resource.

Think congestion charges in cities like London to reduce traffic, which is essentially taxing the use of the common resource of road space during peak times, or fees to enter national parks.

Like a baguvian tax on using the common resource.

Exactly.

Two,

you can create tradable licenses or quotas.

Issue a limited number of permits to use the resource, like fishing quotas, and let people buy and sell them.

This tends to ensure that the people who value the resource most, or can use it most efficiently, end up holding the licenses.

And three, perhaps the most fundamental solution in some cases, assign property rights.

If you can effectively turn the common resource into private property, then the owner has a strong incentive to manage it sustainably to maximize its long -term value.

And that brings us to a really hopeful example.

Saving fisheries with individual transferable quotas, ITQs.

You mentioned overfishing is a huge global problem.

Massive.

Stocks collapsing everywhere.

North Atlantic, Mediterranean.

Bluefin tuna is critically endangered.

Fisherman's livelihoods are threatened.

The work gets more dangerous as they have to go further out for fewer fish.

So how do ITQs help?

With ITQs, fishermen get a license, often long -term, that allows them to catch a specific amount, their quota.

And crucially, they can usually sell or lease that quota to others.

Research shows this can actually reverse fishery collapse.

Why?

Because the fisherman now owns a share of the future catch.

They have a direct financial stake in keeping the fish stock healthy for the long run.

It changes their whole mindset.

Completely.

There was this fisherman, Arne Fouvog, who said something like, now we want to keep the resource healthy.

Keep it for future generations.

It becomes an asset to protect.

Look at the Alaskan halibut fishery.

Before ITQs, the season was this frantic, dangerous derby lasting maybe two or three days.

After ITQs, it stretched to eight months, became much safer, and apparently insanely profitable.

Ownership matters.

That's a fantastic turnaround.

And there's another interesting case of playing similar ideas using ecotourism to save jaguars in Brazil.

Yeah, that's a great one.

The initial problem was classic.

Ranchers saw jaguars only as a threat.

Even though hunting them was illegal, jaguars killed some cattle, maybe 1 percent, so ranchers often just shot them.

Negative externality, right?

The rancher bears the cost, doesn't see the broader value.

Right.

Leading to an inefficient outcome for the jaguars.

So this guy, Mario Haberfeld, started the On Safari project.

His idea wasn't about stricter enforcement, but about changing the ranchers' incentives.

Make the jaguars valuable to them.

By setting up high -end ecotourism lodges on these huge ranches, tourists would pay good money to see jaguars in the wild.

So the project worked on habituating the jaguars, making them easier to From like 7 percent to 95 percent in the dry season, these lodges became very successful, charging thousands per visitor.

So the ranchers started seeing dollar signs when they saw a jaguar.

Exactly.

As Haberfeld put it, ranchers now realize they lose money by killing jaguars.

By creating a market essentially tied to the jaguar's existence, they turn a liability into an asset worth protecting.

It addressed the externality by assigning value.

Incredible.

Okay, so we've covered public goods and common resources.

What about that last category?

The ones that are excludable, you can charge for them, but they're non -rival, so my use doesn't affect yours.

Right, those are the artificially scarce goods.

Think on -demand movies again, software, digital music, ebooks.

The defining conflict here is this.

The cost of letting one more person consume the good, the marginal cost, is basically zero.

It costs Netflix nothing extra for me to stream a show that's already on their server.

Precisely.

So from an efficiency standpoint, the price should be zero.

If the cost of providing it to one more person is zero, then anyone who gets even the tiniest bit of benefit should be able to consume it for maximum social welfare.

But if the price is zero, how does Netflix or the movie studio ever make back the millions they spent creating the content in the first place?

Exactly the problem.

They have huge fixed costs making the movie, developing the software.

If they charge zero, they'd never cover those costs and would go out of business.

No more movies, no more software.

So they have to charge a positive price to make a profit and incentivize creation.

They make the good artificially scarce by charging for it.

Okay, so what's the economic consequence of charging, say, $4 for that movie stream when the marginal cost is zero?

The consequence is inefficiently low consumption, which creates deadweight loss.

When the price is $4,

only people who value watching that movie at $4 or more will actually stream it.

Anyone who values it at, say, $3 or $2 or even $1 .50 won't watch, even though it would cost society literally nothing to let them watch it.

So potential benefits are lost just because the price is higher than marginal cost.

Correct.

If you drew it on a graph, you'd see the demand curve, the marginal cost at zero along the bottom axis.

The efficient quantity is where demand hits zero, but the market quantity occurs back where demand hits the positive price, $4.

That gap between the market quantity and the triangular area associated with it is the deadweight loss value lost to society.

This sounds kind of like the issue with natural monopolies, too.

High fixed costs, low marginal costs.

Very similar dynamic.

In both cases, price has to be above marginal cost for the firm to survive, but that leads to underconsumption compared to the efficient outcome.

And this leads us straight into a very modern problem,

digital piracy.

Absolutely.

Software, movies, music, games, they are prime examples of artificially scarce goods.

Hugely expensive to create, virtually costless to copy and distribute digitally.

So producers charge to recoup costs and make profit, making them artificially scarce.

Which creates a massive incentive for piracy.

An illegal copy costs the pirate next to nothing to distribute, and the consumer gets it for free or very cheap.

It bypasses the artificial scarcity completely.

The scale is enormous, right?

Trillions in losses for IP holders.

Huge numbers get thrown around.

That Game of Thrones finale example, 1 .5 million illegal downloads in just eight hours.

Estimates suggest maybe 36 % of software installed globally is pirated.

And trying to stop it through law enforcement is incredibly difficult.

It's like playing whack -a -mole.

As soon as one source is shut down, others pop up.

The economic incentive getting something valuable for free when its marginal cost of copying is zero is just incredibly powerful.

Wow.

So wrapping this all up, from the River Thames in the 1850s filled with sewage, to trying to stop illegal downloads of movies today, understanding these basic characteristics, excludable versus non -excludable, rival versus non -rival is just fundamental.

It explains so much about why some markets just work, and why others need government intervention or maybe clever solutions like ITQs or ecotourism to get us the goods and services we actually need or want.

It really is the key takeaway.

These categories, private, public, common resource, artificially scarce.

They aren't just abstract terms for your econ class.

They genuinely explain the world around us.

They explain why we pay taxes for roads and defense, why fisheries collapse, why software costs what it does, and why piracy is such a persistent issue.

Understanding these distinctions gives you powerful tools to analyze real world economic problems.

Absolutely.

So a final thought for listening.

As you go about your day, maybe start looking around through this lens, the park you walk through, the music you stream, the clean air you hopefully breathe, the wifi signal you use.

Try categorizing them.

How do their characteristics, rivalry, excludability influence how they're provided, how much they cost, and maybe even the challenges surrounding them.

It offers a really interesting way to see the economic forces shaping our everyday lives.