Question

1.   Both public goods and common property resources involve externalities.

a)   Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market quantity of public goods generally greater or less than the efficient quantity?

b)  Are the externalities associated with common resources generally positive or negative? Use examples in your answer. Is the free-market use of common resources generally greater or less than the efficient use?

Answer 1

(a) In general, public goods give rise to positive externalities. Public goods are non-rival and non-excludable in consumption. Therefore consumption of public goods add a positive social value to such goods, creating positive externality. For example, when government establishes a free school, all of the local neighborhood benefits from such education. In presence of positive externality, free-market quantity of the public good is less than the efficient quantity.

(b) Common resources give rise to negative externalities. Common resources are rival and non-excludable in consumption. Therefore consumption of common resources add a negative social value to such goods, creating negative externality. For example, when 10 persons use a fishing lake, the 11th person has a lower share of the fish, therefore a negative externality in consumption arises. In presence of negative externality, free-market quantity of the common resource is greater than the efficient quantity.