Chapter 11: Public Goods and Common Resources

Why some markets fail — and what governments can do about it

Section 1

The Four Types of Goods

Not all goods work the same way in markets. Mankiw classifies every good by two key properties. Understanding these properties tells you exactly where markets work well and where they fail.

Excludability: Can you prevent someone from using the good if they don't pay?
Rivalry: Does one person's use reduce the amount available for others?

Combining yes/no on each property gives exactly four categories. This 2×2 matrix is the organizing framework for the entire chapter.

Rival
(use reduces supply)
Not Rival
(no congestion)
Excludable
Private Goods
Ice cream, clothing, food, cars
Club Goods
Cable TV, streaming, toll roads (uncrowded)
Not Excludable
Common Resources
Fish in ocean, clean air, congested roads
Public Goods
National defense, fireworks, basic research
Rival = depletes Not Rival = no depletion Excludable = can charge Not Excludable = can't charge

Markets work well for private goods — you can charge for them and price excludes non-payers. Markets struggle with the other three categories because excludability and/or rivalry break down.

Key Insight The two problem categories for markets are public goods (market won't provide them because of the free-rider problem) and common resources (market overuses them because of the tragedy of the commons). Both are forms of market failure.

Classify the Goods

Click a good from the bank, then click the quadrant where it belongs. Check your answers when done.

Select a good below, then click its correct category

National Defense Fish in Ocean Netflix Sandwich Lighthouse Congested Road Toll Road Fireworks Show
Private Goods
Club Goods
Common Resources
Public Goods

Section 2

Public Goods and the Free-Rider Problem

A public good is non-excludable and non-rival. Once provided, everyone can use it and one person's use doesn't reduce how much is available for others.

Classic examples: national defense, knowledge from basic research, public fireworks displays, flood control dams, street lighting.

The Free-Rider Problem Because you can't exclude non-payers, rational people have no incentive to pay for a public good — they can "free-ride" on others' contributions. If everyone thinks this way, the good is underprovided or not provided at all by the private market.

The Diagram

Private market demand reflects only what people reveal they're willing to pay. But for a public good, everyone benefits simultaneously — so the social benefit is much larger than what any one person admits.

People understate their willingness to pay because they hope to free-ride. The market quantity falls short of the efficient quantity. This is why governments — not markets — typically provide public goods.

Government's Role Government uses cost-benefit analysis: provide the public good if total benefits to society exceed total costs. The challenge is measuring those benefits when people have no incentive to reveal their true willingness to pay.

Examples of public goods governments provide: national defense, basic scientific research, anti-poverty programs, lighthouse maintenance, flood control. Note that whether to provide public goods is a political decision — economists help quantify the costs and benefits.

Section 3

Common Resources and the Tragedy of the Commons

A common resource is non-excludable but rival. Anyone can use it, but one person's use reduces what's left for others. Because no one owns it, there's no price signal to slow consumption.

Examples: fish in the ocean, clean air, groundwater, a congested highway, a public pasture, the global atmosphere.

Tragedy of the Commons Each individual user faces an incentive to take as much as possible before others do — even though everyone acting this way destroys the resource. Rational individual behavior leads to collective disaster. The social cost of each person's use is not reflected in any private price, so the resource is systematically overused.

This is the mirror image of the public goods problem. With public goods, the benefit is non-excludable, leading to under-provision. With common resources, the cost is non-excludable (can't charge for the depletion you cause others), leading to over-consumption. Both are negative externalities the market doesn't price in.

The Fishing Pond Simulation

Each fisherman catches 3 fish per click. There are 4 fishermen. Watch what happens when everyone acts in their own interest.

Fish Remaining
40
Stock is low! At this rate the pond will be depleted soon.
Critical level — the fish cannot reproduce fast enough to survive.
The pond is empty. No fish remain. Everyone loses — this is the Tragedy of the Commons.
Total caught: 0

Notice how each fisherman is individually rational: "If I don't take the fish, someone else will." But when all four think this way, they collectively destroy the resource. The social optimum — sustainable fishing — requires coordination the market alone cannot provide.

Section 4

Government Solutions

Both public goods and common resources are forms of market failure — the market either under-provides or over-depletes. Governments have three main tools to correct these problems.

Regulation

Directly limit use of common resources or mandate provision of public goods.

Fishing quotas, emissions standards, hunting seasons, catch limits.

Pigovian Taxes

Tax the use of common resources to make private cost equal social cost.

Carbon taxes, congestion pricing, emissions permits (cap-and-trade).

Property Rights

Assign private ownership of the resource. Owners have incentive to preserve its value.

Privatizing fisheries, tradeable fishing permits, land ownership.

Each solution has trade-offs. Regulation requires enforcement and information. Pigovian taxes let markets decide who uses the resource but require knowing the right tax level. Property rights create efficient incentives but may raise equity concerns (who gets the rights?).

Connection to Externalities (Ch. 10) Common resources involve a negative externality: each user imposes a cost on others (depletion) that is not reflected in any market price. Public goods involve a positive externality: providing the good benefits others who didn't pay. Both cases call for government intervention for the same reason — externalities make the private market outcome socially suboptimal.

Comparing Solutions for Common Resources

Quick Review

Key Takeaways

  • The two properties — excludability and rivalry — create four categories of goods. Private goods have both; public goods have neither.
  • Public goods (non-excludable + non-rival) suffer from the free-rider problem: rational people won't pay for something they can get for free, so markets under-provide them.
  • Common resources (non-excludable + rival) suffer from the tragedy of the commons: each individual overuses the resource because they bear all the benefit but share the cost of depletion with everyone.
  • Both are forms of market failure — externalities the market can't price. Public goods create positive externalities; common resource overuse creates negative ones.
  • Government solutions include regulation (quotas, limits), Pigovian taxes (raising private cost to match social cost), and property rights (giving owners incentive to conserve).
  • The hard part of public goods policy is measuring benefits: people have no incentive to reveal their true willingness to pay, so cost-benefit analysis is inherently difficult.