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1、Unit12MarketImperfectionandtheRoleofGovernment(PrinciplesofEconomics,Chapter10&11)TheDifferentKindsofGoodsWhenthinkingaboutthevariousgoodsintheeconomy,itisusefultogroupthemaccordingtotwocharacteristics:Isthegoodexcludable?Isthegoodrival?TheDifferentKindsofGoodsExcludabilityrefer
2、stothepropertyofagoodwherebyapersoncanbepreventedfromusingit.Rivalryinconsumptionreferstothepropertyofagoodwherebyoneperson’susediminishesotherpeople’suse.TheDifferentKindsofGoodsFourTypesofGoodsPrivateGoodsGoodsthatarebothexcludableandrivalinconsumptionPublicGoodsGoodsthatarene
3、itherexcludablenorrivalinconsumptionCommonResourcesGoodsthatarerivalinconsumptionbutnotexcludableNaturalMonopoliesGoodsthatareexcludablebutnotrivalinconsumptionFigure1:FourTypesofGoodsRival?YesYes?Ice-creamcones?Clothing?Congestedtollroads?Fireprotection?CableTV?Uncongestedtollr
4、oadsNoPrivateGoodsNaturalMonopoliesNoExcludable??Fishintheocean?Theenvironment?Congestednontollroads?Tornadosiren?Nationaldefense?UncongestednontollroadsCommonResourcesPublicGoodsPUBLICGOODSAfree-riderisapersonwhoreceivesthebenefitofagoodbutavoidspayingforit.TheFree-RiderProblem
5、Sincepeoplecannotbeexcludedfromenjoyingthebenefitsofapublicgood,individualsmaywithholdpayingforthegoodhopingthatotherswillpayforit.Thefree-riderproblempreventsprivatemarketsfromsupplyingpublicgoods.TheFree-RiderProblemSolvingtheFree-RiderProblemThegovernmentcandecidetoprovidethe
6、publicgood.Thegovernmentcanmakeeveryonebetteroffbyprovidingthepublicgoodandpayingforitwithtaxrevenue.CommonResourcesCommonresources,likepublicgoods,arenotexcludable.Theyareavailablefreeofchargetoanyonewhowishestousethem.Commonresourcesarerivalgoodsbecauseoneperson’suseofthecommo
7、nresourcereducesotherpeople’suse.CommonResourcesCommonresourcestendtobeusedexcessivelywhenindividualsarenotchargedfortheirusage.Thisissimilartoanegativeexternality.Ex:Citycongestionsduringpeakhours.Whenthemarketworksasitshould…Societyderivesmaximumbenefitfromamarket.Butmarketfai
8、lurescanstillhappen.ExternalitiesandMarketIneff
