Externalities and Public Goods. What is an Externality? We just showed that competitive markets result in Pareto optimal allocations — that is the market. [FEBRUARY. Externalities and Public Goods. By S. E. HOLTERMANN. 1. Introduction. This paper attempts to do two things: one is to give a precise analysis. If a good is nonexcludable or partially excludable, there are positive externalities associated with its production and negative externalities associated with its consumption. We say that a good is a rival if one person's consumption of the good prevents others from consuming the good.


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  • Public Goods and Externalities
  • Key points

As elsewhere in this series of blog posts, we make special reference to externalities and public goods presentation of the standard ideas in the influential textbook by Mas-Colell, Whinston and Green MWGalthough we intend our comment to have more general application. We consider the two topics together as that is how they are presented in that text although the connection is, as we shall discuss below, one externalities and public goods must be examined.

Externalities and Public Goods: Theory OR Society?

That which we call a rose by any other name would smell as sweet. The concept is taken for granted by most economists but when one delves under the surface is surprisingly difficult to explain.

This definition has the merit of focusing on the failure of market prices to accommodate all relevant information, but it suffers from deficiencies. In particular, the distinction between pecuniary and non-pecuniary externalities is strained.

What are public goods?

externalities and public goods This recognition presents the thin edge of a rather larger wedge. Whether externalities can be said to arise or not is a consequence, for instance, of ownership relations: Although this can happen through common ownership it can also happen more generally through mechanisms of shared governance that lead similarly to coordinated or unified decision-making.

On this interpretation, the internalization of externalities through appropriate public policies or private actions leads to a once-and-for-all solution to the problem of restoring the perfection of the market.

In a contrasting dynamic externalities and public goods, externalities are not taken as mere data of the problem but as being potentially produced.

Externalities and Public Goods: Theory OR Society?

In such a perspective, externalities are born as a result of a variety of actions on the part of agents, acting individually and collectively.

Externalities and public goods account of how externalities are generated and sustained is needed to complete a theory of them, since in its absence they cannot be explained.


If externalities are pervasive in contemporary societies, as they are, then that requires explanation. Naming is Power A valuable contribution externalities and public goods the technical literature on goods with public good characteristics has been to provide an analytical template through which different kinds of goods could be classified and, thus, the specific problems of provisioning and distribution in the different cases better approached.

In the case of such goods it is widely agreed that there is an externality aspect benefits that are at least partially non-rivalrous and an aspect relating to boundaries excludability. The development of this analytical framework and associated classification system came late.

Much of the definition and analysis of specific cases developed only externalities and public goods the s [9]. Whereas in pure forms, private goods are both excludable and rivalrous, and public goods are neither, club goods are externalities and public goods but non-rivalrous and the commons are non-excludable but potentially rivalrous.

Efficiency conditions and available management strategies can externalities and public goods influenced both by the type of the good within this classification scheme and its more specific additional traits for instance depletable but renewable goods such as fisheries stocks present different problems than ones that are non-depletable but expansible such as intellectual property.

The identification of these different conceptual categories has been useful as it has provided a basis for understanding better the specific difficulties that bringing about a desirable patent of provision in each case presents.


Still, it is far from obvious that the work of constructing such a taxonomy is anything near complete. Public goods are treated by MWG as a special case of externalities.

What are public goods? (article) | Khan Academy

Externalities and public goods, this is far from obvious. Both Lindahl and Bowen identify the condition for optimal provision as being that the sum of marginal rates of substitution between a public and private good must equal their marginal rate of transformation. Public health and welfare programs, education, roads, research and development, national and domestic security, and a clean environment all have been labeled public goods.

Public goods have two distinct aspects—"nonexcludability" and "nonrivalrous consumption. If an entrepreneur stages a fireworks show, for example, people can watch the show from their windows externalities and public goods backyards.

Because the entrepreneur cannot charge a fee for consumption, the fireworks show may go unproduced, even if demand for the show is strong.


The fireworks example illustrates the "free-rider" problem. Even if the fireworks show is worth ten dollars to each person, no one will pay ten dollars to the entrepreneur.