EC120 Lecture Notes - Lecture 21: Free Rider Problem, Pigovian Tax, Externality
Chapter 11
- Negative externalities are when social costs exceed private costs
- Positive externalities are when social benefits exceed private benefits
- Rivalry and excludability:
o Excludable:
▪ Environmental quality and nation defence
▪ Others are less clear
o Rivalry:
▪ Fire protection, radio broadcasts, TV, and creation of new technology
- Goods:
o Private goods:
▪ Excludable and rival
▪ Food, clothes, and most goods in society
o Public goods:
▪ Non-excludable and non-rival
▪ National defence and poverty reduction
▪ Provision likely involves a positive externality
▪ Lighthouses
▪ Benefits from public provision vary in the population
▪ Distributional issues are extremely complex
o Common resources:
▪ Rival and non-excludable
▪ Environmental damage
▪ Negative externality
▪ Clean air and water
• Regulations and taxes on pollution
• Exclusion is not possible
▪ Congested roads:
• Regulations through carpool lanes
• Taxes and fees through road tolls
• Exclusion is very inefficient
▪ Fish and other wildlife:
• Regulations are common during short fishing seasons
• Taxes are possible but not common
• Tradeable permits introduce concept of exclusion
• Hunt licenses auctioned off
o Natural monopolies:
▪ Excludable and non-rival
▪ Drinking water and electricity networks
- Free rider problem:
o A person who receives the benefit of a good but avoids paying for it
o We are all free riders
▪ Using free air or seeing fireworks
o Private actors will not supply sufficient quantities
o Governments can improve outcomes by providing public goods
- Cost benefit analysis:
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EC120 Full Course Notes
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