Question

A common resource is different from a private or a club good, but is relatively similar to a public good. 1) Evaluate this statement using the relevant characteristics, 2) Discuss the type of externality it creates. Make sure to provide examples for the said externality.

Answer 1

Ans) Private resources are both excludable and rivalrous in nature. For eg- food, clothes etc

Club goods are excludable but non rivalrous in nature. For eg-cable television.

Public goods are both non rivalrous and non excludable. For eg- street light.

Common resources are non excludable but rivalrous in nature. For eg- fish in pond.

Public goods and common resources are similar in a sense that their use cannot be made exclusive. Nobody can be excluded from their usage, as monitoring them and avoiding people to use them is tough. For eg- a lighthouse which is a public good cannot be made exclusive as one cannot restrict the spread of light and hence cannot exclude people from availing their benefit. Similarly, keeping people away from catching fish in an ocean, which is a common good, is hard as ocean is very large to monitor.

2) Usage of common resource may lead to negative externality. As a single individual has little incentive in maintaining it, which makes them prone to over utilisation leading to their deterioration. This is known as tragedy of commons. For eg- though clean air is beneficial for all but single individual has little incentive in maintaining it, which leads to its over use and pollution (a negative externality).