Page 785 - Krugmans Economics for AP Text Book_Neat

What you will learn
in this Module:

Module 76 • How public goods are
characterized and why
markets fail to supply
Public Goods efficient quantities of public
goods
• What common resources are
In this module, we take a somewhat different approach to the question of why markets and why they are overused
sometimes fail. Here we focus on how the characteristics of goods often determine • What artificially scarce goods
whether markets can deliver them efficiently. When goods have the “wrong” character- are and why they are
istics, the resulting market failures resemble those associated with externalities or mar- underconsumed
ket power. This alternative way of looking at sources of inefficiency deepens our • How government
understanding of why markets sometimes don’t work well and how government can
intervention in the production
take actions that improve the welfare of society. and consumption of these
types of goods can make
Private Goods—And Others society better off
• Why finding the right level of
What’s the difference between installing a new bathroom in a house and building a government intervention is
municipal sewage system? What’s the difference between growing wheat and fishing in often difficult
the open ocean?
These aren’t trick questions. In each case there is a basic difference in the character-
istics of the goods involved. Bathroom appliances and wheat have the characteristics
necessary to allow markets to work efficiently. Public sewage systems and fish in the
sea do not.
Let’s look at these crucial characteristics and why they matter.

Characteristics of Goods
Goods like bathroom fixtures and wheat have two characteristics that are essential if a
good is to be provided in efficient quantities by a market economy.
■ They are excludable: suppliers of the good can prevent people who don’t pay from
A good is excludable if the supplier of that
consuming it.
good can prevent people who do not pay from
■ They are rival in consumption: the same unit of the good cannot be consumed by consuming it.
more than one person at the same time.
A good is rival in consumption if the same
When a good is both excludable and rival in consumption, it is called a private unit of the good cannot be consumed by
good. Wheat is an example of a private good. It is excludable: the farmer can sell a more than one person at the same time.
bushel to one consumer without having to provide wheat to everyone in the county. A good that is both excludable and rival in
And it is rival in consumption: if I eat bread baked with a farmer’s wheat, that wheat can- consumption is a private good.
not be consumed by someone else. When a good is nonexcludable, the
But not all goods possess these two characteristics. Some goods are nonexcludable— supplier cannot prevent consumption by
the supplier cannot prevent consumption of the good by people who do not pay for it. people who do not pay for it.

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