Consider an example of two people who are next to each other, one raising cattle and the other wheat.
The cattle wander onto the neighboring land to eat wheat because neither of the owners built a fence.
Both parties are to blame for the dilemma.
He looked at two possible scenarios to arrive at the conclusion.
The wheat farmer has the right to expect cattle- free fields.
The cattle rancher is responsible for the damage done to the wheat farmer.
If the damage is costly and the rancher is responsible, the rancher will build a fence to keep the cattle out.
The fence makes the rancher pay the full cost of the damage.
The rancher is more likely to compensate the wheat farmer if the damage to the crop is less than the cost of building a fence.
The cattle rancher is not responsible for the damages his cattle cause to the wheat farmer.
The cattle are close to the wheat.
The wheat farmer is forced to pay the full cost of the damage because of the fence.
The farmer may accept occasional damage as a lower cost option if it is less than the cost of a fence.
When the externality is large enough to justify the expense, the externality gets internalize.
Either the cattle rancher or the wheat farmer will build a fence if the property rights are fully specified.
The fence will keep the cattle away from the wheat and prevent the destruction of the property.
The incentive to internalize any externalities is given by the assignment of property rights under the law interested parties will bar.
It is difficult to correct externalities.
Private solutions to externality problems are not always possible, implying a role for government in solving complex externality issues.
Consider the difference between an example of a rancher and a farmer with adjacent land and an example of a community- wide problem such as pollution.
The parties can bargain with each other at a low cost, which should make a private solution possible.
The externality is absorbed by a fence.
Because of the high bargaining costs in the case of pollution, the government may be necessary.
Most of us imagine a slice of pizza or a jacket when we think of private goods.
When it is possible to prevent consumers from having production, the terms "private" and "public" are used, but they are not the criterion that economists use to categorize private not paid for it from having and public goods.
To understand the difference between public and private access.
Only one person can eat a slice of pizza.
Consider opening a pizza business.
The pizzeria knows it can sell pizzas to consumers.
Consumers are willing to buy pizza because they enjoy it.
Many of the nation's best fireworks displays, but only a small percentage of difficult to exclude, can be seen by hundreds of thousands of people.
Consumers can't be forced to pay to watch fireworks, so they may want more of the good.
fireworks displays and other public goods are underproduced because of the market economy.
People can get public goods without paying for them.
Public goods result in market failure.
Joshua Bell is one of the most famous violinists in the world.
After giving a concert in Boston for $100 a ticket, he decided to perform in a Pizza is a private good.
Asking for donations at the subway station in Washington, D.C.
The music did not need to be purchased to be enjoyed.
It was nonrival in consumption.
It is difficult for a street musician to make a living because they can't force people to pay.
If he draws a large crowd and the music is good, the audience will enjoy $500 worth of music.
He received a loud round of applause at the end of the performance and then moved to the donation basket.
When he counts up the contributions, he only finds $30, the actual amount he earned while playing in the Metro.
Whenever someone gets lic good, a street musician gives a pub to them and they need the audience's help to pay for it.
Many potential musicians won't pay for it if it's a benefit without a lot of people contributing.
The event is placed in a hypothetical context.
Market inefficiencies lower the returns to performing and the private equilibrium amount of street performances is undersupplied in comparison to the social optimum.
The efficient quantity is not produced when payment cannot be linked to production or consumption.
There are many examples of a public good.
National defense is an example of a public good that is subject to a free- rider problem.
Only the government can provide adequate national defense.
Society would not be protected because many people wouldn't pay their fair share.
Defense expenditures are usually funded by tax revenues.
The free- rider problem is almost eliminated because most people pay taxes.
National defense, the interstate highway system, and medical and science related research should be provided by the government.
Public sector provision helps to eliminate the free- rider problem and create a socially optimal level of activity.
Group work is required in a class.
The ability to work as a team is a skill that businesses look for in potential employees.
The free- rider problem can be created by group work in class or the workplace.
Many groups have one member who doesn't put in the time or effort to complete the project.
The person knows that he or she will get the benefit of the group grade without paying the full cost.
You might think that this behavior is lazy or inconsiderate, but it is actually quite rational.
The free rider is wondering if his or her actions will affect the group's grade.
If the work raises the group's grade from a B- to a B, the free rider may find it too costly to participate.
Common- resource goods have characteristics that are excludable.
Satellite televi is a rival in consumption.
It is excludable because you have to pay.
Markets usually provide club goods for customers who don't want to enjoy them.
The cost of adding customers is low once a satellite television network is in place.
Firms are motivated to maximize profits, not the number of people they serve, so the market price is higher and the output is lower than what society wants.
There is a king crab off Alaska.
The crabs are a rival resource because they can only be caught by one boat crew.
exclusion is not possible because any boat crew that wants to brave the elements can catch crab.
The market works well for private goods.
The market needs a hand in the case of public goods.
The club and common- resource goods show the tension between the private and public provision of goods and services.
The four types of goods are summarized in Table 7.3.