Economics: The Public Sector

Difficulty: 3/3 (It is difficult to cleanly define the four types of goods)
Review: 3/5 (Some of the examples they give for the four types of good are hard to grasp)

Everything we have learned up to this point is just the private market. What if something was free though? The private market wouldn't be able to make itself efficient. Thus, government policy can potentially save the market by deciding the cost vs benefit.

Products are either excludable or not excludable. A good is excludable if people can be prevented from using this good. An example of an excludable good is toll roads, and an unexcludable good is like the environment.

Goods are also either rival in consumption or not. This means that someone having the good limits other's ability to have that good. Clothes are rivals in consumption while a cable TV show is not.

In this chapter, Mankiw discusses the non-excludable goods, called common resources if they are rival in consumption and public goods if they are not rival in consumption.

Public goods have a problem because there tend to be free riders, so the government can find ways to tax to pay for the costs of that public good. Examples include national defense, free knowledge (theorems, etc.), and fighting poverty. Governments use cost benefit analyses to determine the value of these goods.

Common resources are summed up in The Tragedy of the Commons. Sheep grazers raise too many sheep and the land becomes barren and unusable. This is because although the land was not excludable, it was rival in consumption because one grazer's use of the land limited the other's use. Other examples include clean air and water, congested roads, wildlife (like poached animals), etc. To solve this, governments can make taxes, regulate, give permits, or change the good into a private one by making it excludable.

Whew, this chapter has a lot to tell.