Both public goods and common resources involve...

Both public goods and common 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?

Both public goods and common 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?

Key Concepts

Externalities

Externalities refer to the unintended spillover effects of an individual’s or firm's actions on others who are not directly involved in the economic transaction. They can be positive, such as the beneficial spillovers associated with public goods where additional users derive benefit without extra cost, or negative, as seen in common resources where individual overuse imposes costs on other users by depleting the resource. Recognizing these externalities is crucial for understanding why markets may fail to allocate goods efficiently.

Public Goods

Public goods are characterized by being non-excludable and non-rivalrous, meaning that one person’s consumption does not reduce the availability for others and no one can be effectively excluded from using them. Because individuals may benefit without directly paying for them (the free-rider problem), the market tends to underprovide these goods, meaning the free-market provision is typically less than the socially efficient quantity. Additionally, public goods often generate positive externalities that extend benefits to others who do not directly pay for them.

Common Resources

Common resources are goods that are non-excludable but rivalrous, meaning that while it is difficult to prevent people from using them, one person’s consumption diminishes the amount available for others. This setting often leads to overuse or depletion of the resource because individual users do not bear the full cost of their consumption, resulting in negative externalities. This negative spillover effect means that the free-market use of common resources is generally greater than the efficient or optimal use, leading to issues such as overexploitation or depletion.

Transcript

00:01 Here we're comparing public goods and common resources in terms of their externalities and free market and efficient quantities.

00:07 So part a here for these public goods, we'd like to know if they're generally positive or negative externalities associated with them.

00:14 And we tend to see what these public goods is positive externalities.

00:18 And the reason we see these positive externalities is because the benefits from this public good received by one person are, that does not impact whatever benefits another person may.

00:30 Received from this public good.

00:32 So we see here is that this social value of the public good is much greater than its private value.

00:37 And we could see some examples of this in terms of, say, national defense.

00:45 If one person receives the benefit here, everybody else is still able to receive a similar benefit.

00:51 It's not used up by that one person.

00:55 And because these public goods, a good term to remember here is that these are non -excludable.

01:04 So what this is telling us is that this free market quantity of these non -excludable goods is equal to zero, meaning that our free market quantity is going to be less than the efficient quantity.

01:25 Now part b here, we're doing the same thing what we're talking in terms of common resources instead.

01:30 Now common resources, on the other hand, are going to be excludable goods and excludable resources...

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