Question 5 (a)

Public goods and common resources; the main reason for market failure

6 marks

Time to write: About 12 minutes
Topic: Public goods and common resources

Question

Question 5 (a) · 6 marks

Distinguish between a public good and a common resource, with examples. What is the main reason for market failure?

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

Distinguish…What is the…?Two asks in one question: answer both.
Distinguish betweenSet the differences out in a table, basis by basis, not as two separate essays.
with examplesExamples are asked for: one short example with each point.

Write it in this order

Read; underline the asks; jot your points 1 min
1 The distinction by rivalry 2 marks 3 min
2 Examples of each 1½ marks 3 min
3 The main reason for market failure 2½ marks 4 min
Check: every ask answered, key terms underlined 1 min

123

Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Public goods and common resources distinguished. Both are non-excludable: it is extremely hard to keep anyone from using them. They differ on rivalry.

Basis	Public good	Common resource
Excludable?	No	No
Rival in use?	No: one person's use does not reduce what others get	Yes: what one person takes is not left for others
Typical problem	Free riding, so it is under-provided	Over-use, the tragedy of the commons
Usual remedy	Government provision, decided by comparing costs and benefits	Defining property rights over it

So a public good suffers because too little of it gets paid for, and a common resource because too much of it gets used up.

Examples. The examples are our own.

Public good: a tsunami warning siren on the Andaman coast. Every family within earshot is warned, and one family's hearing it takes nothing from another. A family cannot be kept from hearing it.
Common resource: firewood on an unfenced hillside in Uttarakhand. Each load cut leaves less for the others (rival), yet villagers cannot easily be kept off open land (non-excludable).

The main reason for market failure. In both cases the main reason is non-excludability, and with it the presence of externalities: because users cannot easily be kept out, it is hard to make them pay for the good, so its benefits and costs do not reach the people deciding how much to supply or use.

For a public good, each person's contribution benefits others who do not pay her for it, a positive externality that leads to free riding. The market then supplies an inefficient quantity.
For a common resource, each user's taking harms others, a negative externality that he does not count, so the resource is used beyond its efficient level.

More generally, externalities are effects on others for which no one is paid or penalised, and no market exists for them. Market failure here means that the market alone does not reach the efficient quantity.

Conclusion. A public good is non-rival and a common resource is rival, while neither is excludable. Non-excludability, which leaves benefits and costs unpriced as externalities, is the main reason the market fails in both.

Where the 6 marks sit

#	Component	Marks
1	The distinction by rivalry	2
2	Examples of each	1.5
3	The main reason for market failure	2.5
	Total	6

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