# Public Goods, Common Resources, and Externalities ## Different Types of Goods - Public Goods: neither excludable nor rival, free market does a very BAD job. - Private Goods: both excludable and rival, free market is very efficient in distributing such goods. - Club Goods: excludable but not rival, market does an OK job - Common Resource: not excludable but rival, market does a very BAD job. ## Public Goods - Free-rider problem - Solutions - Advertising - Forcing everyone to pay - Cost-benefit analysis can be sophisticated in some cases. ## Common Resources - Tragedy of the Commons = if all the boats belong to one company, less boats will be sent out... A single company controlling the whole industry will consider the cost and benefits globally. - Solutions - Property rights and quotas. - Tolls ## Externalities - Externality (either positive or negative) - An agent engages in an activity which changes the welfare of another agent - The change in welfare goes uncompensated - Problem is, the pollution cost is hard to measure, i.e. hard to internalize the externalities - Negative externality creates too much of a thing, positive externality creates too little of a thing - Private solution - "Coase Theorem", as long as we can assign property rights, externalities can be internalized by negotiation - Sometimes transaction cost is too high to bring all agents together. - Governmental solution - Pollution quota - Tax, in such case the quota can be traded among companies