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Consider the following statements regarding Public Goods and Externali

June 1, 2025 by rawan239

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 ?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

This question was previously asked in

UPSC CAPF – 2024

Download PDF Attempt Online

Statement 1 is correct. Public goods are defined by two main characteristics: non-rivalry (consumption by one person does not reduce availability for others) and non-excludability (it is difficult or impossible to prevent individuals who have not paid from consuming the good). Examples include national defense or street lighting. Statement 2 is incorrect. Markets typically fail to provide the optimal amount of a good when externalities are present. Negative externalities (like pollution) lead the market to produce too much of a good from a societal perspective, while positive externalities (like vaccination) lead the market to produce too little. The market price does not reflect the full social costs or benefits in the presence of externalities, leading to inefficiency.

Public goods and externalities are classic examples of market failures, where the unfettered market mechanism does not lead to a socially optimal outcome.

Government intervention, such as direct provision (for public goods) or Pigouvian taxes/subsidies, regulations, or tradable permits (for externalities), is often required to address these market failures and move towards a more efficient allocation of resources.

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