Question

1. Some resources are private, others are common, and still others are public.

1. Define a private resource, common resource, and public resource, explain your definitions, and provide one example of each.
2. What problem prevents the efficient provision and management of a common resource by private unregulated markets?
3. What problem prevents the efficient provision and management of a private good or service by private unregulated markets?
4. What is the obstacle to the efficient production by free markets of goods and services like national defense?
5. List one consequence of (b), (c), and (d) above and its possible solution.

Answer 1

1. Some resources are private, others are common, and still others are public.

1. Define a private resource, common resource, and public resource, explain your definitions, and provide one example of each.

Resources can be defined on the basis of two characteristics i.e. excludability and rival in consumption. Excludability means people who cannot pay for it are prevented from consuming it. While rival in consumption means two persons cannot consume the same unit at the same time.

Private resource: A resource which is both excludable and rival in consumption is known as a private resource. Example: cloth.

Common resource: A resource which is available to everyone by providing benefits to the users is known as a common resource. The characteristics of common resources are non-excludability and rival. It decreases in value as the number of users increases. Example: forest resource.

Public resource: A resource which is both non-excludable and non-rival is known as a public resource: Example: public sanitation.

2. What problem prevents the efficient provision and management of a common resource by private unregulated markets?

The problem which prevents the efficient provision and management of a common resource by private unregulated markets is that it has externality problem. If someone uses it more, then there is less left for the other. The private unregulated markets will not take care of a common resource unless they earn some profit. Therefore, they would want to tax the public over a common resource.

3. What problem prevents the efficient provision and management of a private good or service by private unregulated markets?
   
   The problem which prevents the efficient provision and management of a private good or service by private unregulated markets is unhealthy competition and the profit motive.
   
4. What is the obstacle to the efficient production by free markets of goods and services like national defense?

The obstacle to the efficient production by free markets of goods and services like national defense is that since these goods and services are non-excludable and non-rival, private firms will not want to produce them as they cannot charge people for consumption of such resources. It has a free-rider problem.

5. List one consequence of (b), (c), and (d) above and its possible solution.

b) The consequence is resource depletion or exploitation of a common resource such as forest for which individual users should be made accountable by taxing them or by trading rights to use the resource.

c) The consequence is goods and services are over-priced. It prevents people from enjoying basic necessities. The government should regulate the market to some extent.

d) The consequence is that the government has to be the sole provider of public goods. However, the government can tax the public accordingly by analyzing the cost-benefit analysis of the public project.