Public Goods: neither excludable nor rival, free market does a very BAD job.
Private Goods: both excludable and rival, free market is very efficient in
distributing such goods.
Club Goods: excludable but not rival, market does an OK job
Common Resource: not excludable but rival, market does a very BAD job.
Public Goods
Free-rider problem
Solutions
Advertising
Forcing everyone to pay
Cost-benefit analysis can be sophisticated in some cases.
Common Resources
Tragedy of the Commons = if all the boats belong to one company, less boats
will be sent out… A single company controlling the whole industry will
consider the cost and benefits globally.
Solutions
Property rights and quotas.
Tolls
Externalities
Externality (either positive or negative)
An agent engages in an activity which changes the welfare of another agent
The change in welfare goes uncompensated
Problem is, the pollution cost is hard to measure, i.e. hard to internalize
the externalities
Negative externality creates too much of a thing, positive externality creates
too little of a thing
Private solution
“Coase Theorem”, as long as we can assign property rights, externalities can
be internalized by negotiation
Sometimes transaction cost is too high to bring all agents together.
Governmental solution
Pollution quota
Tax, in such case the quota can be traded among companies