2012 Multiple Choice (Public Goods)

2012 Multiple Choice (Public Goods)

Answer - (D) National Defense

Understand: public good - An item whose consumption is not decided by the individual consumer but by the society as a whole, and which is financed by taxation.

A public good (or service) may be consumed without reducing the amount available for others, and cannot be withheld from those who do not pay for it. 

From the Market Failure cheat sheet here.

One more thing - often the questions ask about the marginal cost of public goods.

The marginal cost of a public good is zero.

Adding one more person to our National Defense is zero.

Market Failure - 7 Tragedy of the Commons & Asymmetric Information

Tragedy of the Commons - Resources

Tragedy of the Commons - Garrett Hardin, 1968

- a term introduced by Garrett Hardin that refers to users of a commons ( a common pool, for example a pasture) where in his original analysis the process inevitably leads to the destruction of the resource (for example, overgrazing of the pasture) on which users depends.

Garrett Hardin video

Common-access resources (common pool resources) share two characteristics

• It is difficult to exclude individuals from deriving benefits from the good or the resource.
• There is rivalry in the consumption of common-access resources (one individuals consumption subtracts from the benefits available to others using the resource).

The effects of the Tragedy of the Commons behavior may be illustrated using a negative externality diagram. Where MSC > MPC.

Tragedy of the Commons, examples

Tragedy of the Commons and the Pilgrims

Solutions to Tragedy of the Commons

Private property rights - Government Taxes - Regulation

Library of Liberty, Property Rights

Stossel on Tragedy of the Commons - Video

Learn Liberty - Tragedy of the Commons - Video

Negative Externalities and the Coase Theorem - Video

Learn Liberty - Tragedy of the Commons - reading

Reffonomics - The Lighthouse Story - slide show

Coase Theorem  - "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities.

• Coase theorem in real life, example - reading
• Lincoln Center Renamed - Coase in action..

• Bees and Barbed Wire, example - reading

Technology increasing property rights - Barb Wire  - reading

How Fishing Communities Protect Their Future - reading

Of the four released AP exams and the last ten years of FRQ's I have found no questions on Tragedy of the Commons. If anyone knows anything different, please drop me a line. wcwaugh@aol.com.

Asymmetric Information

When either the buyer or the seller possess incomplete or inaccurate information.

Asymmetric Information leads to the following:

• Adverse Selection - often one party knows more about a good than another, often, the seller knows more about the good being sold than the buyer.

Implications of costly information - Morgan Rose
Adverse Selection - Reading at amos web - nice examples

• Moral Hazard -  people will take risks, when others will assume the consequences of those actions.

video - by Texas Enterprise

Video, Fraser institute 2011 student contest

Again, no questions found but I would suspect some questions pertaining to concept, about Asymmetric Information.

Market Failure 6 - Public Goods

Market Failure - Public Goods

Public Goods - are non-excludable & non-rivalrous.

• non-excludable - it is not possible to prevent people who have not paid for a good from using                                 it. 
• non-rivalrous - consumption of the good by one person does not prevent others from also                                    consuming it. 

Free-riders are those who can use a good without paying for it.

Examples given: National Defense - it is not possible to exclude anyone within a country's borders while at the same time protecting those borders. Individuals are protected if they have paid or not. 

Public Goods by Tyler Cowen - Good Read

mjmfoodie on Public Goods- 

2005 AP Microeconomics Exam

Answer (B) an increase in the optimal quantity of the good.