Online Macroeconomics

Online Macroeconomics

Assignment 10

Public Goods and Common Resources, Chapter 11 in Mankiw’s Microeconomics Text.

Please Note: this is the second assignment for which your textbook reading comes from Mankiw’s microeconomics text. Like I did for Assignment 9, I have posted in Canvas a PDF of the Chapter you must read for this Assignment 10. It is reproduced from Mankiw’s microeconomics textbook: Chapter 11 on Public Goods and Common Resources.

Chapter 11 covers two types of goods that private markets have trouble supplying efficiently and fairly – public goods and common resources. Mankiw teaches this chapter right after the Externality chapter because both public goods and common resources have externality features. May I add Mankiw’s Chapter 11 is a masterpiece of clarity and conciseness – 11 crisp pages that explain the key features of these two special kinds goods.

Most goods in our economy are private goods, and free markets are great at providing these. This is because private goods have two characteristics:

  1. Private goods are excludable. This means when you own a private good, you can prevent other people from using that good. The car you normally drive is a private good because you can legally prevent me from trying to use your car without your permission. If I would try to do that without your permission, you could make legal trouble for me because we are a nation with well-established property rights – a key feature of economic success.
  2. Private goods are rival in consumption. This means when you consume a private good, it diminishes other people’s ability to consume that same good. If you are driving your car, this diminishes my ability to drive your car at the same time.

On pages 212-213 in section 11-1, Mankiw defines all these terms, and has a lovely box that illustrates the different categories.

i have attached a word doc for for the assignment i want to get done 1

But some goods are neither excludable nor rival in consumption. Economists call these goods public goods. The classic example is national defense. If you are reading these words in the United States, or in someplace outside of the United States that American national defense is helping protect, you are consuming the service of United States national defense. And your consumption of national defense does not allow you to exclude me from consuming that same national defense. Contrast this with the car you drive. Since you own it, you can prevent me from driving it, and if I would try to drive your car against your will you can get our government to impose sanctions on me for stealing your private property. Additionally, if you consume national defense it does not diminish my ability to consume that same national defense. This is not true of a private good like the car you drive. If you drive that car, then I cannot be driving that same car at the same time. So unlike private goods, national defense is non-excludable, and non-rival.

Other examples of public goods include tornado sirens and fireworks displays. Two other public goods Mankiw discusses in 11-2b on pp. 214 and 215 are basic research, and fighting poverty.

You may recall the first Marginal Revolution video you watched in week 1 discussed how research into a vaccine was non-rival and non-excludable.

The problem with public goods is that something of value has no price attached to it. People can consume these goods without paying for them. If you don’t pay your taxes, you still get national defense. This is called the free rider problem. (Mankiw, 11-2a p. 214) If I don’t donate money to charities that help the poor, I can ‘free ride’ off the donations of others, since helping the poor makes my life better in many ways even though it appears likely I will never again be poor. So private markets will have trouble supplying enough national defense or tornado sirens or anti-poverty programs.

Fireworks displays are public goods because it is difficult to prevent people who don’t pay taxes from watching a fireworks display, and if you are enjoying a fireworks display, it probably does not diminish my ability to enjoy that display. So I cannot recall a private company charging admission for fireworks. Instead, putting on these displays is usually determined by local governments.

Deciding how much of a public good is socially desirable is a difficult task. Mankiw discusses in 11-2c on pp. 216-217 how policy makers try to use cost-benefit analyses to determine if a project should be built or not. Basically if the marginal benefit of more public goods is greater than the marginal cost, we should produce more. But although we can usually add up the cost of a public good fairly accurately, like the cost of a new road, determining the benefit of a public good is more difficult. How much benefit do you get from a fireworks display or a new road? If we conduct surveys, people who will benefit from the new road have an incentive to over-estimate the benefit to them, and people who will not benefit directly have an incentive to underestimate the benefit to them.

Take note of the case study in 11-2c on pp. 217-218. Determining how much a human life is worth is a fascinating exercise – and a little creepy. Mankiw does pay respect to the notion that human life is priceless. Yet he also describes a clever way that economists have actually gone about determining for policy purposes how much money it makes sense for us to spend if we want to save one more human life.

The dollar amount a human life is worth that Mankiw uses in his textbook is one used in many articles I have read about the value of social distancing versus the cost to our economy because of the Corona pandemic. It is used in this excellent discussion, although as you will see if you take the time to read all that article, the analysis is complicated: are young lives worth more than elderly lives, and if so, how much more?

On some level, human life is priceless – a perspective Mankiw agrees with as do I – but at the policy-level, we have to have a dollar value of a life if we are going to decide whether for example it makes economic sense to put up another stoplight or not.

Finally, note that although private markets have difficulty providing public goods in sufficient amounts, after we decide through our government that we should produce a public good like a tornado siren or a fireworks display, we can certainly contract the production of those goods out to private firms. Again, on the principle that we would like to keep as much of the economy as possible in private hands, most economists think we are usually better off contracting out public goods production to private companies, rather than the government establishing its own fireworks factories. On the other hand, some public goods like clean water or prisons seem to lend themselves best to public production rather than private enterprise because the negative externalities of the profit incentives to reduce costs and maximize revenues are so high.

In section 11-3, Mankiw next discusses common resources, a second type of good which governments often regulate. A common resource is a good that is rival in consumption, but not excludable. These include goods like wildlife, the environment, and congested non-toll roads. An important common resource in Western Kansas is the Ogallala Aquifer, a large underground lake that many farmers in the west use to irrigate.

Common resources suffer from overuse because, although they are rival in consumption, they are non-excludable. If you pump water out of the ground to irrigate your land in Western Kansas, there is less water for me to use. But without any government intervention, people are free to use as much water as they want. What we would expect over time is that the aquifer will be overused which is in fact what is happening with this valuable source of water. There are some smart people at K-State working on the problem, but we certainly cannot just adopt a laissez-faire approach if we are going to use this water responsibly.

This problem is known as the Tragedy of the Commons, which Mankiw defines on p. 218 in 11-3. In medieval England, people were allowed to graze their sheep on common land in the village, and the result was that the common land was overgrazed.

Another common resource you have thought about before is wildlife, the deer some of my students like to hunt, or fish in the ocean. Because most of the oceans are in international waters, anyone can go catch all the fish they want. But if you catch fish, I cannot catch those same fish, so your catching those fish diminishes my ability to catch fish. The fish are non-excludable, but rival in consumption. In the absence of international agreements that limit access to those fish, we would expect overfishing to occur. This is exactly why the greatest fishery in the world – the Grand Banks fishery off eastern Canada and New England, collapsed in the 1990s.

This graph taken from that article dramatically illustrates the point in the 1950s when the cod began to be harvested at an unsustainable rate:

i have attached a word doc for for the assignment i want to get done 2

This is a very cautionary tale. Individual fishers found it in their self-interest to go catch a lot of fish, but because those fish are a common resource, these choices were not also socially optimal. This is a break-down of Adam Smith’s invisible hand.

This is also why if you fish or hunt in the United States you need a license, and there is normally a limit to the amount of fish or game you are allowed to take from the wild. The basic solution to solving the problem of the tragedy of the commons is to limit access to the commons.

I hasten to add that most of the hunters and fishers I know are strong conservationists who understand the importance of practicing responsible fishing and hunting because they know it is good for our ecology, and because they want to preserve these activities they love for themselves and for their descendants.

Another solution to the tragedy of the commons is to turn the common resource into private property. Consider why cows are plentiful yet elephants have been endangered. Mankiw has a case study on this in 11-3 on pp. 222. Cows tend to be private property so the people who own them have an incentive to protect them, whereas elephants tend to be common resources and so like all common resources are at risk from being overused. In several African countries, governments are in fact turning elephants into private property in an effort to increase their numbers.

A common public resource I bet a lot of you experience regularly is a crowded public highway. At least, you did before COVID-19.

There is a highway north of Johnson County Community College called I-435. In the afternoon between 4:30 and 6:00 this highway is terribly congested – there are too many cars on this road, and drivers’ commute times are greatly increased. To economists, the fact that this road is overcrowded is a sign that driving on that highway is rival in consumption – your driving on that road diminishes my ability to drive on that same road; but it is not excludable – anyone who wants to can drive on I-435. The natural result is that this common resource is overused.

In Kansas City, we are trying to control the access with stoplights at onramps. Although these efforts seem feeble to me at present, they are a step in the direction of controlling access to reduce the overuse of a common resource.

Traffic economics are pretty fascinating. If people leave the recommended 2-second following distance between their car and the one in front of them, and drive 60 miles per hour, then an average lane of highway can handle 30 cars a minute, or 1800 cars per hour. But during rush hour, this rate slows to like 300 cars per hour. Just when we need the most traffic flow, we get the least! This is another problem self-driving cars will eventually help us solve.

A related public policy discussion which is likely to be coming to any large city you live near in your lifetime is the controversial idea of congestion pricing. Congested roads are an indication that the price of getting on those roads is too low. And to economists, the best solution to this problem is to make it more expensive to get on those roads. Some cities, like London, now charge drivers a tax if they use certain congested roads at certain times of the day:

Note the Freakonomics column in 11-3b on pp. 220-221 that discusses this concept. Note also the large majority of economists in the Ask the Experts box in 11-3b on p. 219 who agree this is a good idea. I would favor it in Kansas City if the money were used to help finance more public transportation, or used to lower other taxes like sales taxes.

Like mandating that people buy health insurance, charging people higher taxes to drive on roads during peak hours makes a lot of economic sense. And outrages many people. Michael Bloomberg, the former Mayor of New York City, proposed introducing a congestion charge in New York a couple of years back. Bloomberg’s proposal was soundly defeated in the New York State Legislature by representatives fearful such a charge would harm poor drivers and create “Lexus Lanes” for the wealthy. Nonetheless, other cities like Singapore, Stockholm, and Milan also now have congestion pricing. Look for this policy to be proposed and enacted in an increasing number of cities around the world.

Tasty Homework Fiesta

Make sure your assignment is properly saved as yourlastname.Assignment 9.docx.

  1. What is cost-benefit analysis of public goods? What is the main difficulty with this kind of analysis for public goods? (8 points)

Read about “The Case for Toll Roads” in 11-3b on pp. 220-221 (Remember this is not Ch. 11 of your regular textbook, but the Ch. 11 I posted on Canvas for this assignment).

  1. How many hours a year does the article say the average American urban traveler lose to traffic congestion? How much has it increased since 1982? (4 points)
  1. Tell me when and where you regularly experience congested roads. Explain why or why not you would be willing to pay a tax of $1 each time you experience that congestion to get rid of it? (8 points)
  1. Assuming people are driving 60 mph and leaving 2 seconds between each car as experts recommend, how many cars can a lane of traffic handle in 1 hour? During rush hour, when we need the maximum flow of traffic, what do I estimate in my notes the number of cars one lane can handle drops to? Then describe one of the three solutions to this problem discussed by either me or Mankiw in this assignment. (8 points)

Here is another Marginal Revolution Video on Externalities.

  1. In a paragraph of at least 5 sentences, summarize the toll booth experiment, how it was conducted, and what the results were. (10 points)
  1. Explain the result from another study discussed regarding how pollution affects either German chess tournament moves or umpire calls in American baseball games. (4 points)
  1. What does Tabarrok mean when he summarizes that “Pollution is an attack on human capital”, and why discovering this could actually be good news. (6 points)

Marginal Revolution Video. Watch the following Marginal Revolution video on Public Goods.

  1. Look up on the internet the KT-Event. Where does this theory conclude the asteroid hit that caused ¾ of the species on earth to disappear, and how long ago did it happen? (4 points)
  1. If we decide to invest in asteroid diversion, why will young people benefit more from this investment than old people? (4 points)
  1. Why is it so difficult to get people today to invest tax money in an unlikely but potentially devastating event like an asteroid impact? (4 points)

Make sure your assignment is properly saved as yourlastname.Assignment 9.docx.

  1. On pp. 214-216 11-2b (remember this is the online pdf Chapter 11, not Ch. 11 in your textbook), Mankiw discusses 3 public goods – National Defense, Basic Research, and Fighting Poverty. Pick one of these goods and explain with at least 4 sentences why it is a public good and how the government can potentially improve economic well-being by providing this good. (8 points)
  1. 4th of July Discussion Question:  Independence Day is this week, and so I’m going to give you a chance to think about the American Experience.  You have a choice regarding which topic you will post on this week.  You can either read the poem “The New Colossus,” by Emma Lazarus:

Or you can listen to the song “American Tune,” by Paul Simon.

There are lots of directions you could take this, looking into the background of either work, or what was going on in the United States when they were written, or maybe what part of the American Experience they make you think of.  Perhaps there is a particular part of either you find meaningful.   Please provide at least a 4-sentence response to either of these works of art. (12 points)

Multiple Choice

Identify the choice that best completes the statement or answers the question. (2 points each)

____ 1. Both public goods and common resources are

a. excludable.
b. rival in consumption.
c. Non-excludable.
d. Non-rival in consumption.

____ 2. Goods that are not rival in consumption and not excludable would be considered

a. common resources.
b. club goods.
c. public goods.
d. private goods.

____ 3. I-435 is often congested, but anyone with a license can go drive on it. This makes I-435 what kind of good?

a. A common resource.
b. A public good.
c. A club good.
d. A private good.

____ 4. Because public goods are

a. excludable, people do not have an incentive to be free riders.
b. Not excludable, people have an incentive to be free riders.
c. excludable, people have an incentive to be free riders.
d. Not excludable, people do not have an incentive to be free riders.

____ 5. Without government intervention, common resources tend to be

a. Overconsumed, and public goods tend to be underproduced.
b. underconsumed and public goods tend to be underproduced.
c. Underconsumed and public goods tend to be overproduced.
d. Underconsumed and public goods tend to be underproduced.

____ 6. The main problem with deciding how much to spend on a public good is

a. the benefits usually exceed the costs.
b. The costs usually exceed the benefits.
c. benefits are easier than costs to measure.
d. costs are easier than benefits to measure.

____ 7. Two possible values for human life discussed in the notes and the chapter are:

a. $10 million and priceless.
b. $5 million and $10 million.
c. $5 million and priceless.
d. Priceless and $0.

____ 8. The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States. Any farmer with land above the aquifer can at present pump water out of it. We might expect that

a. Over time, the aquifer will be underused.
b. Farmers on their own will conserve water for the greater good.
c. Government intervention will not help us preserve this water.
d. over time, the aquifer is likely to be overused.

____ 9. The fishery discussed in the notes which was the richest in the world, but has been overfished beyond a sustainable level is

a. the Gulf of Mexico.
b. the Gulf of California.
c. The Grand Banks.
d. The Bering Sea.

____ 10. Elephants are endangered, but cows are not because

a. cows are not as valuable as elephants.
b. elephants are private goods, while cows are common resources.
c. cows are a private goods, while elephants are common resources.
d. it is legal to kill cows but not elephants.

Make sure your assignment is properly saved as yourlastname.Assignment 9.docx. Make sure when you submit your assignment into the Assignment 10 folder in Canvas, you are submitting the document with your answers on it, and not a blank document.

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