Consider the following statements regarding Public Goods and Externalities: 1. Non-rivalry and non-excludability are two characteristics of Public Goods 2. Market can provide the optimal amount of a good in the presence of externalities Which of the statements given above is/are correct?

Q: What is the answer to CAPF 2024 Paper I Q103?

A. Correct — A, 1 only. Statement 1 is the standard definition. A pure public good is non-rival, meaning one person's use does not reduce what is available to anyone else, and non-excludable, meaning nobody can practically be kept from using it — national defence, a lighthouse and street lighting are the usual examples, and the combination is why private suppliers cannot charge for them and why the state provides them. Statement 2 is the opposite of what the theory says. An externality is a cost or benefit falling on someone outside the transaction, and because the decision-maker does not face it, the market equilibrium settles at the wrong quantity — too much of an activity with a negative externality, too little of one with a positive externality. That is the textbook case of market failure, and it is why taxes, subsidies and tradable permits exist. (Provisional — pending the official UPSC key.)

(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2

Answer

Why

Correct — A, 1 only. Statement 1 is the standard definition. A pure public good is non-rival, meaning one person's use does not reduce what is available to anyone else, and non-excludable, meaning nobody can practically be kept from using it — national defence, a lighthouse and street lighting are the usual examples, and the combination is why private suppliers cannot charge for them and why the state provides them. Statement 2 is the opposite of what the theory says. An externality is a cost or benefit falling on someone outside the transaction, and because the decision-maker does not face it, the market equilibrium settles at the wrong quantity — too much of an activity with a negative externality, too little of one with a positive externality. That is the textbook case of market failure, and it is why taxes, subsidies and tradable permits exist.

Why the others are wrong

(b)2 only — It rejects the definition of a public good and accepts the claim that externalities leave the market at the optimum. Both halves are the wrong way round.
(c)Both 1 and 2 — The definition in statement 1 holds, but the claim in statement 2 does not. If markets already produced the optimal quantity under externalities, there would be nothing for a pollution tax to correct.
(d)Neither 1 nor 2 — Non-rivalry and non-excludability are precisely the two defining properties of a public good, so statement 1 cannot be rejected.

Concept

Goods can be sorted on two axes, rivalry and excludability. A private good is rival and excludable. A pure public good is neither. A common-pool resource such as a fishery is rival but not excludable, which produces overuse. A club good such as a toll bridge is excludable but not rival. Externalities cut across this classification: they arise whenever an action imposes an uncompensated cost or confers an uncompensated benefit on a third party, so that private cost and social cost diverge.

Statement 2 is worth reading twice, because the words optimal amount are doing the work. Markets do produce an equilibrium under externalities; what they do not produce is the socially efficient quantity. Remedies follow directly from that gap — a Pigouvian tax equal to the marginal external cost, a subsidy for a positive externality, tradable permits that create a market in the missing right, or a bargain between the parties where property rights are clear and transaction costs are low.

Key facts

A pure public good is non-rival in consumption and non-excludable in supply.
Non-excludability produces the free-rider problem, which is why private markets undersupply public goods.
An externality is an uncompensated cost or benefit falling on a third party.
With a negative externality the market produces more than the socially efficient quantity, and with a positive externality less.
A common-pool resource is rival but not excludable, and a club good is excludable but not rival.

Goods sorted by rivalry and excludability

Rival and excludable→Private good — a loaf of bread

Non-rival and non-excludable→Pure public good — national defence, a lighthouse

Rival and non-excludable→Common-pool resource — an open fishery

Non-rival and excludable→Club good — a toll bridge below capacity

Statement 1 names the second row exactly; statement 2 denies the market failure that follows from an externality.

Study next

The free-rider problem and why public goods are publicly providedPigouvian taxes and subsidies as corrections for externalitiesThe Coase theorem and bargaining over property rightsThe tragedy of the commons and Elinor Ostrom's work on managing itMerit goods and demerit goods distinguished from public goods

Common traps

Treating anything provided by the government as a public good; the test is rivalry and excludability, not ownership.
Reading equilibrium as optimum; markets clear under externalities but at the wrong quantity.
Confusing a common-pool resource with a public good.

A two-statement item pairing a definition with a claim about efficiency, where the second statement is the reverse of the standard result.

Related PYQs

No directly related past PYQ was found.

Practice

practice — not a real PYQ
An open-access fishery is best described as
- (a)A private good
- (b)A pure public good
- (c)A common-pool resource
- (d)A club good
Answer(c) A common-pool resource — rival in use but hard to exclude anyone from, which is why it tends to be overfished.
practice — not a real PYQ
In the presence of a negative externality in production, the free market will produce
- (a)Less than the socially efficient quantity
- (b)More than the socially efficient quantity
- (c)Exactly the socially efficient quantity
- (d)Nothing at all
Answer(b) More than the socially efficient quantity — the producer does not bear the external cost.