Question

Classify each of the following items as a public good, a private good, a natural monopoly good, or a common resource. Explain your answer. A free ice-cream Wild goats in the forest Wealth management services A highway

Short answer

Free ice-cream: Private good. Wild goats: Common resource. Wealth management services: Private good. Highway: Natural monopoly good.

Step-by-step solution

- Define the Goods

Start by understanding the four types of goods:- Public Goods: Non-excludable and non-rivalrous.- Private Goods: Excludable and rivalrous.- Natural Monopoly Goods: Excludable but non-rivalrous.- Common Resources: Non-excludable but rivalrous.

- Classify the Free Ice-Cream

A free ice-cream is excludable, as the supplier can choose who gets the ice-cream. It is also rivalrous because once consumed, others cannot consume the same ice-cream. Therefore, it is a private good.

- Classify Wild Goats in the Forest

Wild goats in the forest are non-excludable since anyone can potentially access them. They are rivalrous because if one person captures or uses a goat, others cannot use the same goat. Therefore, they are a common resource.

- Classify Wealth Management Services

Wealth management services are excludable as only those who pay for the service can benefit from it. They are also rivalrous because the advisor's time and attention are limited. Therefore, it is a private good.

- Classify a Highway

A highway can be excludable if tolls are charged, but generally, it is not excludable. It can become rivalrous when it is congested. However, when it is not congested, it is non-rivalrous. Therefore, it can be considered as a natural monopoly good.

Key concepts

Public Goods

Public goods are unique because they are both non-excludable and non-rivalrous. This means that individuals cannot be excluded from using these goods, and one person's use does not reduce the availability for others. Classic examples of public goods include national defense, clean air, and public parks. Since everyone benefits from these goods and their usage does not detract from another's ability to enjoy them, public goods often require government provision and maintenance.

Challenges associated with public goods include the 'free rider problem,' where individuals can benefit from the good without contributing to its cost, and ensuring sufficient funding for their provision.

Private Goods

Private goods are both excludable and rivalrous. This implies that individuals can be prevented from using these goods, and one person's consumption diminishes the quantity available for others. Examples include food items, clothing, and private services like a haircut.

Free ice-cream and wealth management services classified in the exercise exemplify private goods. A free ice-cream is excludable because only certain individuals receive it, and rivalrous because once it's consumed, it's not available for others. Similarly, wealth management services are excludable and rivalrous since they are limited to paying clients and use the advisor's finite resources.

Private goods are typically provided by the market as businesses can charge for them and so have an incentive to produce and sell them.

Natural Monopoly

Natural monopolies arise when a good is excludable but non-rivalrous in consumption until a certain point. This means that the supplier can control who gets access to the good, but supplying it to one more person doesn't reduce its availability to others initially. Classic examples include utilities like water, electricity, and cable TV services.

In the exercise, highways can be classified as natural monopolies. While tolls make them excludable, they are non-rivalrous when not congested, as one more vehicle can use the highway without impacting others. Issues occur when usage surpasses a threshold, leading to congestion, making the resource rivalrous during peak times.

The existence of natural monopolies raises important regulatory issues, as unchecked monopolies might exploit consumers.

Common Resources

Common resources are non-excludable but rivalrous. This means they are available for everyone to use, but one person's usage can reduce the availability for others. Examples include fisheries, forests, and the atmosphere.

Wild goats in the forest from the exercise illustrate a common resource. They are non-excludable as anyone can potentially hunt or capture them. However, they are rivalrous because once a goat is captured, it's no longer available for others.

Challenges with common resources include overuse and depletion, often described by the 'tragedy of the commons.' Effective management and regulation are needed to sustain these resources for future generations.