Page 353 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 23.4 Non–excludable Goods and Market Failure

On the basis of competency, the non-excludable goods are classified into two categories:
(i) Common Property Resources
(ii) Public goods/products
These are some of the major market failures—

(i) Common Property Resources
As shown in Fig. 23.1, The Common Property Resources (CPR) has indicated on the top right side by
point C where high degree of jointness and high degree of rivalry have shown. In other words, it shows
rivalry and non-excludable products. So for CPR, anyone can use these products and nobody has any
rights for it. To catch a fish in sea is an example of CPR. As a person catches fish is affected to another but
no one can prevent or stop the other to do so, because to catch a fish in sea is nobody's exclusive right.
For example, the common land of a village has ownerships of every farmer. If a farmer grazes his sheep
there, the feed for the other farmer’s sheep can decrease. This is called “Tragedy of Commons” or can
also be called bad episode of commons.
Thus there is unskilled use of common property. It can happen till the destruction of that property.
In CPR condition, market fails to distribute the factors in good way.
Socially Optimal Exploitation of CPR—What should
In the words of Lipsey, “The socially optimal the optimal exploitation of CPR? We can understand
allocation of a common property resource occurs this by an example. We take example of fishing.
when the marginal cost of the last user equals the It would be socially optimum to get a new boat for
value of the marginal addition to total output.”
fishing if the cost to operate the boat is less than (equal
to) the value of total catch by the additional boat.
Thus, in common land situation, it would be optimal if there is an increment of one sheep, if the cost
of grazing (means the loss of available feed for sheep) is equal to or less than the price of milk or meat.
We have to equate marginal cost of additional user with the value of the marginal addition to total
output.
The free markets or perfectly competitive markets do not offer socially optimal solutions—In the
example of fishing, to invest in fishing industry or to put a boat in fishing depends upon that what
is the cost of typical fishing boat and the cost of running new boat. In independent market, the new
experimentalist of CPR increases the market until the marginal cost of last entrants is equal to average
production of existing producers. Thus, the excess use of CPR shows its exploitation.
This condition is represented by Fig. 23.2.

Fig. 23.2

Total Cost:
Y Actual level with Old technology
old Technology T
Socially
optimal t E T' Total Cost: New
Value (in `) E 1 E 2 Actual level with
level
technology
new Technology
O V X
S K N A
Number of Boats

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