Question

Exercise #7 (this addresses the idea of public finance)

Explain the concepts of Rival, NonRival, Exclusive and NonExclusive in regards to Economics. What is the nonexclusive aspect of a public good?

1. Please use the Matrix. Show the relationships between rival goods, nonrival goods, exclusive goods and nonexclusive goods with private goods, public goods, regulated monopoly, and tragedy of the commons. (8 points)
2.   Give examples from common social practice or class to illustrate your answer (you must use the concept and definition of the Coase Solution and Transaction Costs to explain this answer). (8 points)
3. What is the nonexclusive aspect of a public good? (4 Points)

Answer 1

Rival: When consumption of a good by one individual affects consumption by another individual, it means the good is rival in nature. For e.g. houses. If one individual buys a house, it will leave less options for other buyers. This means the goods are rival in nature Non-Rival: When consumption of a good by one individual does not affect consumption by another individual, it means the good is non-rival in nature. For e.g. if people are watching TV, one person's viewership will not affect other person's viewership of the TV. This means the goods are non-rival in nature Exclusive: when it is possible to exclude one individual from consuming a good, it means the good is exclusive or excludable. For e.g. by setting a price for houses, the seller can exclude those who cannot afford to pay that price Nonexclusive: When it is impossible to exclude anyone from consuming a good. For e.g. one cannot exclude an individual to consume air The matrix is below: Excludable Non-Excludable Rivalry Private good Common pool resource Club good Public good Non-Rivalry Tragedy of commons occurs in case of common resource goods which are rival and non-excludable in nature. These goods due to their non-excludable nature are consumed by everyone till it degrades, and being rival in nature, one person consuming more leaves less for others. This leads to the problem of tragedy of commons.

Transaction costs: costs involved in making economic decisions or transactions. For e.g. legal fees, communication fees etc. Coase theorem: It applies to goods imposing externalities on to the society. As per this theorem, in case of well defined property rights and zero transaction costs, it is possible for individuals to arrive at a socially efficient level of output through bargaining and without seeking government interference. Nonexclusive part of public good means it is not possible to exclude anyone from consuming the good. For e.g. in case of public goods like air, one cannot make anyone not consume air or breathe.