Public Goods and Common Property Resources

In this post, I will cover two additional types of problems that the traditional free market structure faces: public good and common property resources. In both cases, the lack of ability to structure ownership in the form or private property prevents efficient allocation of resources.

First, a normal, market good is defined as something that is rival and exclusive; that is, only one person may use it, and the use of one prevents it from being used by others. These goods fall under the sphere of private property for efficient management, as what is essentially described is a good for which the requisites for private property are met: exclusivity, transferability, and enforceability.

A public good is the exact opposite of a normal good - it is non-rival AND non-exclusive. That is, one person using the good does not prevent someone else from using it, and that use does not prevent another person from using the good in the future.

The quintessential example of a public good is the lighthouse. The light from the lighthouse is provided to all and the provision cannot be withheld; moreover, any individual seeing the light does not prevent another individual from seeing the light, as well.

Public goods have a problem that is well understood - free ridership. Since you cannot prevent anyone from gaining access to the benefits of the good, no one is willing to pay for it. This means that the amount of resources allocated to providing a public good will be inefficiently low in a market situation.

To rectify the problem, an outside agency must provide the good and force individuals to pay for it, assuming that they can provide the good without it costing more than the benefits. This outside agency is, invariably, the government, as in many cases. This is why the government provides and maintains things such as lighthouses.

In between public goods and normal goods are common property resources. These goods are rival and non-exclusive. That is, they can be used by anyone, and the use will, eventually, prevent others from using the resource.

The problem commonly associated with common property resources is 'tragedy of the commons,' a phrase coined by Hardin in his paper of the same name. In the paper, he describes a system of common grazing grounds in which each individual herder comes to the rational decision to overgraze, eventually ruining the pasture for everyone.

This decision is reached because the individual herder gains the full benefit of grazing, but shares the cost of grazing with everyone. As such, from the herder's perspective, it is always efficient to graze more.

In essence, this problem causes individuals to utilize a resource to an inefficiently high degree. Put theoretically, individuals aim to use the resource until Net Revenue = Net Cost, rather than Marginal Revenue = Marginal Cost as normal. NR = NC is the point at which zero actual profit is gained, and this is, obviously, an incredibly inefficient allocation of resources.

Fixing the problems associated with common property resources is much more difficult than it is with public goods. There are two broad approaches - regulation from an outside source, and privatization.

Privatization involves changing the common property resource into a normal good. This is done by associating some cost to use the good, thereby changing it from non-exclusive to exclusive. As normal goods co-exist with capitalism in a much more beneficial way than common property goods, this is often the method by which the problem is fixed.

Regulation involves an outside source, again almost invariably the government or a government agency, that comes in and prevents individuals from overusing the resource. This approach is commonly used in the management of fisheries, where the regulatory agency simply prevents individuals from fishing above a certain amount by making it illegal to fish without a permit and strictly regulating the number of available permits.

This approach is largely used when privatization fails to be a realistic option, as the cost of privatizing a common property resource is often unimaginably high.

Two random asides before I wander off to do other things...

First of all, there exists a third sort of good - exclusive, non-rival goods. These are called club goods, and things such as television fall into this category. That is, you can prevent people from watching television, but one person watching television has no impact on the ability of another person to watch television.

Secondly, for those of you more environmentally inclined, the evolution from public good to common property resource is a well documented phenomenon in that area. This evolution occurs as population density increases. That is, as the density of population increases, what was once a public good with non-rival traits becomes a common property resource, with rival traits.

For example, imagine a river. If one person lives on the river and goes to the bathroom in it fairly regularly, there is little impact on the river itself and no other individuals to get upset. This situation occurs even when there are two, or three people living on the river, although perhaps not if they live right next to one another. This is an example of a public good.

However, when you have 10,000 people living on the river, if they all go to the bathroom it suddenly becomes a river of waste that no one wishes to live next to. As a result of the non-exclusive nature of using the river as a waste-removal method, it has been ruined for everyone. This is an example of a common property resource, with the only variable changed being that of population density.

And now I am done. Hopefully this was interesting. I will be moving, fairly soon, the actual finishing article of this series. I believe I have two more topics I want to cover first, and then we will be able to examine when it is that the government should be involved in the economy, what I believe to be a particularly important question.

Comments, suggestions, questions, and insults may all be put down below. In the comments section, not some other definition of down below...

Odd Things

So, the service through which I normally get email was transferred to Google recently and, as such, I now have two separate accounts set up to post here. Kind of weird, but it should work out fairly well.

This post is largely to clear up confusion and let anyone who actually checks this regularly that I'll have another post up by Thursday at the latest.