78. Classifying Goods and Resources

Resources Goods, services, and resources can be classified along several dimensions:

• Excludability: A good or service is excludable if only the people who pay for it are able to enjoy its benefits. An automobile or watching an NFL game in person would be excludable. A good or service is nonexcludable if everyone benefits from it regardless of whether they pay for it. National defense or a town’s 4th of July fireworks display are nonexcludable.

• Rivalry: A good, service, or resource is rival if its use by one person decreases the quantity available for someone else. A blouse or a slice of pizza is rival. A good, service, or resource is nonrival if its use by one person does not decrease the quantity available for someone else. Watching television or national defense would be nonrival.

Based on these differences, goods, service, or resource can be classified into one of four categories:

• A private good is both rival and excludable. A cow owned by a dairy farmer is a private good.

• A public good is both nonrival and nonexcludable. National defense is a public good.

• A common resource is rival and nonexcludable. Fish in the ocean are a common resource.

• A natural monopoly is nonrival and excludable. Cable television is a natural monopoly.

79. Public Goods

A public good is both nonrival and nonexcludable. National defense is a public good.

A public good creates a free-rider problem—the absence of an incentive for people to pay for what they consume. Public goods have a marginal social benefit that differs from the marginal social benefit for a private good. Because everyone can consume services from the same unit of a public good, the marginal social benefit of a public good is the maximum amount that all the people are willing to pay for one more unit. The economy’s marginal social benefit curve for a public good is obtained by vertically summing each individual’s marginal benefit curve. The efficient quantity of a public good is the quantity that sets the marginal social benefit equal to the marginal social cost. At this quantity, society’s net benefit from the public good is maximized. Through public provision, the government has the ability to produce the efficient quantity of the public good. The government can levy a tax and use the funds collected to pay for the public good. The private marketplace fails to achieve efficiency when providing a public good because of the free-rider problem. Because private firms likely will not be paid for the good or service, the private market underproduces public goods, leading to inefficiency.Voters’ preferences vary and each voter demands a different level of the public good from government. Politicians propose policies for public goods provision, but they will not gain sufficient political support unless a majority of the voters agree on the proposal. So politicians propose policies that will gain the approval of the majority of voters. The principle of minimum differentiation describes the tendency of competitors to make themselves identical to appeal to the maximum number of clients or voters. This principle explains why the proposals of different politicians are often similar.