80. Common Resources

A common resource is rival and nonexcludable. Fish in the ocean are a common resource. The tragedy of the commons is the absence of incentives to prevent the overuse and depletion of a commonly owned resource. When nobody owns a resource, each individual consumer fails to consider the full opportunity cost of consuming it, so the resource is consumed at a higher than inefficient rate.

The example of the commons problem comes from medieval England. Grasslands near a town were called the commons because they were publicly accessible by all villagers to support their livestock. These grasslands were over-grazed and usually couldn’t support much livestock. Sustainable production of a resource is the rate of production that can be maintained indefinitely. As more of a renewable resource is harvested, there is less left to reproduce and replace what has been harvested. If heavy harvesting depletes the resource stock to levels that are too low to replace the amount harvested, then the size of the stock available for harvest declines over time and that harvest rate is not sustainable. As more people use a resource, the total quantity increases until some level, after which it decreases. The table gives some data on the sustainable catch of fish.

The total catch is the sustainable catch of the fish.

The average catch is the quantity harvested per fishing boat.

The marginal catch is the change in total catch that occurs when one more boat joins the existing numbers. For a common resource, the marginal catch is always less than the average catch because some of the extra catch harvested by an additional boat will be taken from that which the previous boats would have caught before the additional boat began harvesting the resource.

81. Externalities in Our Lives

82. Negative Externalities: Pollution

Private Costs and Social Costs

• A private cost of production is a cost that is borne by the producer. Marginal private cost (MC) is the cost of producing an additional unit of a good or service that is borne by the producer of that good or service.

• An external cost is a cost of producing a good or service that is not borne by the producer but is born by other people. A marginal external cost is the cost of producing an additional unit of a good or service that falls on people other than the producer.

• Marginal social cost (MSC) is the marginal cost incurred by the entire society—by the producer and by everyone else on whom the cost falls—and is the sum of marginal private cost and marginal external cost:

MSC = MC + Marginal external cost.

83. The Anatomy of Factor Markets

The four factors of production are labor, capital, land (natural resources), and entrepreneurship.

• Labor services are traded in the labor market. The price of labor is the wage rate. Most labor services are traded on a contract, called a job.

• Capital goods are traded in goods markets. Capital services are traded in rental markets. The services of capital that a firm owns has an implicit price that arises from depreciation and interest costs. Firms that buy capital and use it themselves are implicitly renting the capital to themselves.

• The price of the services of land is a rental rate. Nonrenewable natural resources are resources that can be used only once.

• Entrepreneurs receive the profit (or loss) that results from their business decisions and their services are not traded in markets.