AASHANK SINGH

23BA097
SECTION -D

INTRODUCTORY
METHODS
FOR
MICROECONOMICS
ASSIGNMENT
Q.1) What are public goods? discuss pure and impure public goods. State a few important cases
of public goods (Application of public goods).

Economists have a very strict definition of public goods, and one of the most common
misconceptions around the same is that everything financed through taxes and government
spending is a public good. In reality, Public goods are a fundamental economic concept that
plays a crucial role in understanding market dynamics and government intervention.

Definition of Public Goods:

Public goods are goods or services with two key characteristics: non-excludability and non-
rivalry.

Non-Excludability:

The non-excludability of public goods lies at the heart of their definition. In essence, it refers
to the inherent difficulty or near-impossibility of excluding individuals from enjoying the
benefits of a public good, regardless of their contribution or lack thereof. This characteristic
distinguishes public goods from private goods, where access is typically restricted based on
payment. The non-excludable nature of public goods introduces a unique dynamic into
economic analysis. Unlike private goods, producers of public goods face significant challenges
in limiting access only to those who have paid for the goods. This characteristic generates what
is known as the "free-rider problem," wherein individuals can benefit from the public good
without contributing to its provision.

An example that can be taken here is the National defence policy in India, even if you don’t
agree to it or don’t pay for the maintenance of the Armed forces you are still protected by them.
Another example can be Public parks. Once a park is established and open to the public, all
individuals enjoy its benefits, Whether or not someone contributes financially to the
maintenance of the park, they can still access and enjoy its amenities.

Non-Rivalry:

Non-rivalry is the second defining characteristic of public goods. It denotes that the
consumption of a public good by one individual does not diminish its availability or utility for
others. In contrast to private goods, where consumption is rivalrous and one person's use
diminishes the quantity available for others, public goods exhibit a fundamentally different
nature. The non-rivalrous nature of public goods has profound implications for economic
efficiency. It means that the marginal cost of providing the good to an additional consumer is
essentially zero. This is in stark contrast to private goods, where each additional unit incurs a
marginal cost.

A real-life example here can be street lights, even if they are used by one person it does not
reduce the availability of the same for other people enjoying its benefits. Another example can
be television and radio broadcasts of national events, such as a presidential address or a major
sports game, Many people across the country can tune in to watch or listen to the same
broadcast simultaneously. The consumption of the broadcast by one person does not limit its
availability to others.

Some Examples of Public Goods

 1) Education and Knowledge: Knowledge is often considered a public good. Once
information is available, it can be shared and utilized by multiple individuals without
exclusion or rivalry. Educational initiatives, scientific research, and the dissemination
of knowledge contribute to the public good by enhancing societal understanding and
capabilities.
2) Technological Advancement: certain technological innovations exhibit characteristics
of public goods. Open-source software, Like UPI, is often non-excludable and non-
rivalrous. Once developed, it can be freely accessed and used by individuals without
diminishing its availability for others.
There are certain problems in the use and classification of public goods let us take a look at
them.

1) Optimal Provision:
Determining the optimal level of provision for public goods becomes a complex task. The
absence of a market price, typical for private goods, complicates the assessment of consumer
preferences and the appropriate level of provision. This leads to challenges in achieving
allocative efficiency.

2) Government Intervention:
The need for government intervention in the provision of public goods becomes apparent.
Taxation serves as a mechanism for financing public goods, and governments play a critical
role in addressing the free-rider problem, ensuring efficient allocation, and overcoming market
failures associated with public goods.

3)Subjectivity in Excludability:
The degree of excludability can be subjective. What may be considered excludable in one
context might be deemed non-excludable in another. This subjectivity adds complexity when
classifying goods. For example, Public roads even though it's open to all only people with
vehicles will be able to use them, this leads to subjectivity in excludability

4)Free-Rider Problem:
The free-rider problem is a significant challenge associated with public goods. Since
individuals cannot be excluded from enjoying the benefits, some may choose not to contribute
or pay, assuming that others will do so. This can lead to under-provision or the complete
absence of the public good in a purely market-driven scenario.

5) Impure Public Goods:

Some goods exhibit characteristics of both public and private goods, introducing complexity
in their classification. For example, cable television may be accessible to those who subscribe
(excludable) but may face congestion or reduced quality with increased viewership (rivalrous).
Navigating the impurity of certain goods poses challenges for policymakers.

The last two issues of the free-rider problem and Impure Public goods are some of the most
important issues in Public goods so let us take a look at them in detail.

Free Rider Problem

The free rider problem is a phenomenon where individuals benefit from a public good without
contributing to its costs. In simple terms, it occurs when someone enjoys the advantages of a
shared resource or service without paying their fair share. This poses a challenge because if too
many individuals become free riders, the funding necessary to provide the public good may
become insufficient.

Real-Life Example: Public Television Broadcasts

Imagine a community-funded public television station that relies on viewer donations to
operate. The station provides educational programs, cultural shows, and informative content
that benefits the entire community. Now, consider an individual who enjoys watching these
programs but decides not to contribute any money to the station.
Here, the free rider problem emerges. The person benefits from the public good (television
programs) without paying for its production and broadcast. If many individuals adopt a similar
mindset and choose not to contribute, the television station may struggle to secure enough funds
to sustain its operations. Over time, this could lead to a reduction in the quality and variety of
programs offered, ultimately affecting the entire community's access to valuable content.

In this scenario, the free rider problem highlights the challenge of maintaining public goods
when individuals can enjoy the benefits without bearing the associated costs. Policymakers
often grapple with this issue when designing funding mechanisms for public goods, seeking
ways to encourage contributions and ensure the continued provision of valuable services for
the entire community.

Impure Public Goods

Definition: Impure public goods introduce complexity by exhibiting characteristics of both

public and private goods. They often manifest varying degrees of excludability and rivalry.
1. Non-Excludability with Impurities:
• Impure public goods retain elements of non-excludability, but this characteristic
may be compromised to some extent. It becomes possible, though perhaps
challenging, to exclude certain individuals from enjoying the benefits.
2. Non-Rivalry with Impurities:
• While impure public goods generally maintain non-rivalry, there may be
situations where increased consumption by one individual reduces the
availability or utility for others. This introduces a dynamic aspect that
challenges the classical non-rivalrous assumption.
Examples:
• Cable television is a classic example of an impure public good. While the broadcast
signal is non-excludable to those with the right equipment, it is not non-excludable to
those without it. Moreover, increased viewership may lead to congestion or reduced
quality, introducing an element of rivalry.
• Public libraries provide a mix of public and private good characteristics. The library
itself and the general access to books are non-excludable. However, if there is a limited
number of copies of a popular book, the availability becomes rivalrous as more people
want to borrow the same book.
Public Goods and Externalities

The relationship between externalities and public goods becomes apparent in the presence of
positive externalities associated with the provision of public goods. When a public good
generates positive spill over effects, it creates a situation where its societal value exceeds the
private value perceived by individuals. Take education as an example – a well-educated
population not only benefits individuals with education but also generates positive externalities
for society as a whole through increased innovation, productivity, and societal well-being.
In the case of positive externalities, the private market tends to under-provide these goods
because individuals may not fully consider the broader social benefits in their decision-making.
This under-provision leads to a market failure where the socially optimal level of the public
good is not achieved.

Government intervention often becomes necessary to correct the under-provision of public

goods with positive externalities. Policymakers may implement various strategies:

1. Subsidies: The government can provide subsidies to encourage the production or

consumption of goods with positive externalities. For example, offering subsidies for
education can incentivize individuals to pursue higher levels of education, considering
the broader societal benefits.

2. Public Funding: Direct government funding for the provision of public goods is a
common strategy. By financing projects like public infrastructure or education, the
government ensures that these goods are provided at a level that reflects their true
societal value.

3. Regulation: In the case of negative externalities, where economic activities lead to

harmful effects on third parties, governments may introduce regulations or taxes to
internalize the external costs. For instance, imposing emission standards on industries
can mitigate the negative externality of pollution.

While government intervention can address externalities and promote the provision of public
goods, it is not without challenges. Determining the optimal level of intervention, avoiding
unintended consequences, and balancing competing priorities are complex tasks. Additionally,
the risk of government failure, where interventions lead to inefficiencies or unintended negative
consequences, must be considered.

Applications of Public goods

1) National Defence: One of the quintessential examples of a public good is national defence.
Once a nation invests in its defence system, the protection and security it provides extend to all
citizens and excluding any individual from these benefits is impractical. The military protection
offered is non-excludable and non-rivalrous, making it a classic public good.

2) Street Lighting: Street lighting is another tangible example of a public good. Once installed,
the illumination benefits everyone in the community. It is challenging to exclude individuals
from the benefits of well-lit streets, and one person's use does not diminish its utility for others.

3) Public Parks: Public parks exemplify the non-excludable and non-rivalrous nature of public
goods. Individuals can freely access and enjoy the park, and one person's use does not detract
from its availability for others. The collective enjoyment of a public park aligns with the
theoretical characteristics of public goods.

4)Education is a classic example of a public good, exhibiting both non-excludable and non-
rivalrous characteristics. It is non-excludable because once education is provided, it is difficult
to exclude individuals from benefiting. Additionally, it is non-rivalrous as one person's
education does not diminish its availability for others. The positive externalities of education,
such as an informed and skilled workforce contributing to societal well-being, make it a vital
public good. However, challenges arise in valuing these externalities and ensuring equitable
access, emphasizing the importance of public funding and policy interventions to maintain and
enhance educational opportunities for the broader community.

5) Fighting poverty is deemed a public good due to its non-excludable and non-rivalrous nature.
Efforts to reduce poverty benefit society collectively, as once poverty is alleviated, all
individuals can enjoy a higher standard of living. The positive externalities associated with
poverty reduction, such as improved social cohesion and economic productivity, make it a
public good. Private actions to eliminate poverty face the free-rider problem, where individuals
may benefit without contributing. Government intervention through taxation and welfare
programs addresses this challenge, allowing society to collectively improve the well-being of
the poor and create a more equitable and prosperous community.
Q.2) What are externalities? Discuss positive and negative
externalities. Also, state the public policy response to the
externalities that emerge in the market. (Use diagrams where
required). State a few examples of public policy from the
contemporary scenario, to address these externalities. (Any policy
initiative Indian or Abroad must have taken to address
externalities).
Externalities are a fundamental concept in economics that describes the unintended side effects
of economic activities on third parties who are not directly involved in the original transaction.
These effects, whether positive or negative, result from the interdependence of economic
agents and can significantly impact social welfare and the efficiency of markets. The proper
Definition of Externalities is that When an action of an Individual or a firm has an impact
upon another Individual or a firm and they do not pay for it or are compensated for and
it is not accounted for is an externality.

A negative externality occurs, for example, when a steel plant dumps its waste in a river that
fishermen downstream depend on for their daily catch. The more waste the steel plant dumps
in the river, the fewer fish will be supported. The firm, however, has no incentive to account
for the external costs that it imposes on fishermen when making its production decision.
Furthermore, there is no market in which these external costs can be reflected in the price of
steel. A positive externality occurs when a homeowner repaints her house and plants an
attractive garden. All the neighbours benefit from this activity, even though the homeowner’s
decision to repaint and landscape probably did not take these benefits into account

Externalities are some things that are not accounted for in the workings of the market this leads
to inefficiency in explicitly these economic outcomes don't represent the actual cost and
benefits approved to the society. These impacts remain unaccounted possibly due to cost
considerations, and the profitability of the firm which makes the firm hesitant to incorporate
such aspects ( Negative externalities) also quantifying such external effects is a larger challenge
since all the externalities cannot be converted into monetary terms however economists try to
quantify most of such externalities to bring desired economics outcomes.

There are two main types of externalities: positive externalities and negative externalities.
These terms describe the unintended side effects or spillover effects that economic activities
can have on third parties who are not directly involved in the transactions.

Positive Externalities:

• Definition: Positive externalities occur when the consumption or production of a good

or service provides benefits to third parties beyond the direct participants in the
transaction.
• Example: Education is a classic example of a positive externality. When an individual
invests in education, they gain knowledge and skills, leading to personal development
and potentially higher income. However, society as a whole also benefits from having
a more educated and skilled workforce, contributing to economic growth, innovation,
and societal well-being.
 • Impact: Positive externalities often lead to underproduction or underconsumption in a
market, as the private actors do not capture the full social benefits. Public policies such
as subsidies or government provisions are often used to address positive externalities.

Negative Externalities:

• Definition: Negative externalities occur when the consumption or production of a good

or service imposes costs on third parties who are not directly involved in the transaction.
• Example: Air pollution from industrial production is a classic example of a negative
externality. The producers may not bear the full cost of pollution, leading to adverse
effects on the health and well-being of nearby residents. The private cost of production
does not fully account for the external costs imposed on society.
• Impact: Negative externalities often lead to overproduction or overconsumption in a
market, as the private actors do not bear the full social costs. Public policies such as
taxes, regulations, or market-based mechanisms like cap-and-trade systems are often
used to internalize negative externalities by making the private actors take
responsibility for the external costs.

Positive Externalities:

Negative Externalities

Negative externalities: are the negative impact that is being created by a firm or an individual
onto a fellow firm or individual such that it impacts the productivity of the fellow firm, if an
industry produces an output it also produces hazardous waste which is buried into the ground
this leads to contamination of the soil which in turn leads to land degradation and adverse
effects to cost, representing a classic case of negative externalities. Thus the concept of private
cost and public cost is necessary for the proper prevention of such events and for being able to
deal with them.

Because externalities are not reflected in market prices, they can be a source of economic
inefficiency. When firms do not take into account the harms associated with negative
externalities, the result is excess production and unnecessary social costs.

In this graph the above diagram represents the Negative externality, the product has private
value, external value and social value the firm decided to operate at Eo with D as the demand
curve and the given private cost curve, and the firm decides to produce correspondingly Xo
output for the product in the market however this is an Overproduction output because the
external value is not accounted for by the firm, the moment we add the private value to the
external value we get the social value curve being represented by D1 ( SV= PV +EV) by
taking this social value under consideration the socially optimal concentration is reached as
point E1 where the social value equals to private cost with a corresponding output as X1
importantly the socially optimal out is lesser than the market output, that is Xo is More than
X1 this means, whenever negative externalities exist and it leads to over-provision or
overproduction of the commodity under consideration.
Positive Externalaties

Positive externalities: are the positive impact that is being created by a firm or an individual
onto a fellow firm or individual such that it impacts the productivity of the fellow firm, if an
industry produces an output it also produces eco friendly waste which is buried into the ground
this leads to formation of organic manure for the soil which in turn leads to improvement of
land quality and better crops. Thus the concept of private cost and public cost is necessary for
the proper use of such events and for being able to implement them.

Because externalities are not reflected in market prices, they can be a source of economic
inefficiency. When firms do not take into account the benefits it can result in too little
production.

In this graph the above diagram represents the posi2ve externality, the product has private
value, external value and social value the firm decided to operate at Eo with D as the demand
curve and the given private cost curve, and the firm decides to produce correspondingly Xo
output for the product in the market however this is a subop2mal output because the external
value is not accounted for by the firm, the moment we add the private value to the external
value we get the social value curve being represented by D1 ( SV= PV +EV) by taking this social
value under considera2on the socially op2mal concentra2on is reached as point E1 where the
social value equals to private cost with a corresponding output as X1 importantly the socially
op2mal out is greater than the market output, that is Xo is less than X1 this means, whenever
posi2ve externali2es exist it leads to under the provision or under the produc2on of the
commodity under considera2on.

Public Policy Response to Externali4es.

Public policy responses to externalities aim to address the market failures associated with the
unintended impacts of economic activities on third parties. Two main types of externalities—
positive and negative—require distinct policy interventions to internalize the external costs or
benefits. Here, we explore the public policy responses to externalities:

1. Negative Externalities:
a. Taxes and Pigovian Taxes: Internalize external costs by making producers or consumers pay
for the negative externalities they generate. Example: Carbon taxes imposed on industries
emitting greenhouse gases. The tax incentivizes firms to reduce emissions, reflecting the social
cost of pollution.

Let us look at a graph for Taxation as a Solution to Negative Production Externalities: A tax
Of $100 per unit (equal to the marginal damage and pollution) increases the firm's private
marginal cost- curve From PMC1 to. PMC2 which coincides with the SMC Curve The
quantity produced reduces from Q1,to Q2, the socially optimal level of production. This tax
internalises the Externalities and deals with the market inefficiencies.
b. Regulations: Prescribe rules and standards to limit or control activities that produce negative
externalities. Example: Emission standards for vehicles or regulations on waste disposal to
mitigate environmental pollution.
.
2. Positive Externalities:

a. Subsidies: Encourage activities that generate positive externalities by providing financial

support.
Example: Government subsidies for education or research and development to promote
knowledge creation and technological advancements.

Let us look at a graph for Subsidies as a Solution to positive Production Externalities: A

subsidy Of $100 per unit equal to the marginal benefits reduces the firm's private marginal
cost- curve From PMC1 to. PMC2 which coincides with the SMC Curve The quantity
produced increases from Q1,to Q2, the socially optimal level of production. This tax
internalises the Externalities and deals with the market inefficiencies.

b. Government Provision: Directly provide goods or services that generate positive

externalities. Example: Public funding for basic scientific research or the creation of public
parks and cultural institutions.

Namami Gange and Externalities

Namami Gange, launched in 2014, is a comprehensive initiative by the Government of India
aimed at rejuvenating the Ganges River, one of the holiest and most revered water bodies in
the country. This ambitious program underlines the commitment to clean, restore, and sustain
the Ganga, recognizing its ecological, cultural, and spiritual significance.

The Namami Gange initiative addresses a range of challenges facing the Ganges, including
water pollution, inadequate waste management, and the degradation of river ecosystems. The
program focuses on key components such as sewage treatment, riverfront development,
afforestation, and public awareness campaigns to foster sustainable practices.

One of the primary objectives of Namami Gange is to reduce pollution and improve water
quality by treating domestic and industrial effluents. The initiative also involves the
construction of sewage treatment plants and the promotion of eco-friendly cremation practices
to mitigate the impact of human activities on the river.

In addition to environmental restoration, Namami Gange emphasizes the cultural and economic
aspects associated with the Ganges. Projects for the beautification of ghats, riverfront
development, and the promotion of sustainable tourism aim to harness the economic potential
of the Ganga while preserving its cultural heritage.

Positive Externalities of Namami Gange:

1. Ecosystem Restoration:The restoration of the Ganges ecosystem through Namami

Gange creates positive externalities by enhancing biodiversity. A healthier river
ecosystem benefits not only the immediate communities but also downstream areas and
the nation as a whole. The ecological services provided by a thriving Ganges ecosystem,
such as water purification and flood control, have wide-ranging positive effects.

2. Tourism and Cultural Heritage:The initiative's focus on riverfront development and

beautification enhances the cultural and tourism value of the Ganges. Improved
aesthetics, cleaner ghats, and preserved cultural heritage create positive spillover effects
by attracting more tourists and fostering a sense of national pride. The benefits extend
beyond the direct stakeholders to the broader community and the economy.

3. Public Health:Reduction in water pollution and improved water quality positively

affects public health. Communities residing along the Ganges and downstream areas
experience fewer waterborne diseases, leading to improved overall health outcomes.
The health benefits extend beyond those directly involved in the initiative to the larger
population relying on the Ganges for water and sustenance.

4. Community Development: Community-focused projects under Namami Gange, such

as skill development and employment opportunities, generate positive externalities by
contributing to local development. The improved socio-economic conditions of
communities residing along the Ganges can have spillover effects on neighboring
regions, fostering regional development and social well-being.

Negative Externalities of Namami Gange:

1. Displacement and Social Impact: Large-scale projects under Namami Gange may result
in the displacement of communities residing in the project areas. The social and
 economic costs of displacement can be considered negative externalities that need to
be carefully addressed. Ensuring the fair treatment and rehabilitation of displaced
communities is essential to mitigate these adverse effects.

2. Costs of Regulation and Enforcement: The enforcement of regulations and standards to

curb pollution in the Ganges involves costs, which may be seen as negative
externalities. Businesses and industries affected by stringent environmental regulations
may bear additional economic burdens. Balancing the economic interests of businesses
with environmental conservation goals is crucial to avoid unintended negative
consequences.

3. Opportunity Costs of Resources: The resources allocated to Namami Gange projects

involve opportunity costs – the value of alternative uses for these resources. While the
initiative aims for positive environmental outcomes, the foregone opportunities in other
sectors might be considered negative externalities. Evaluating the trade-offs and
ensuring efficient resource allocation are essential to address these costs.

Swachh Bharat

Swachh Bharat Abhiyan, launched in 2014 by the Government of India, is a nationwide

cleanliness and sanitation campaign with the ambitious goal of achieving a Clean India. The
initiative is driven by a holistic approach to address various aspects of cleanliness, hygiene,
and waste management. One of its primary objectives is to eliminate open defecation and
promote the construction of toilets in both urban and rural areas, ensuring access to sanitation
facilities for all.

Under Swachh Bharat Abhiyan, extensive awareness campaigns and community mobilization
efforts have been undertaken to instil a sense of responsibility for cleanliness among citizens.
The initiative recognizes the interconnectedness of cleanliness with public health,
environmental sustainability, tourism, and community development.

Swachh Bharat Abhiyan has witnessed the construction of millions of toilets across the country,
contributing to a significant reduction in open defecation and improvements in public hygiene.
The campaign emphasizes the importance of behavioral change, promoting the use of toilets,
proper waste disposal, and maintaining cleanliness in public spaces.

Positive Externalities of Swachh Bharat Abhiyan:

1. Public Health Improvement:: The primary objective of Swachh Bharat Abhiyan is to

eliminate open defecation and improve sanitation. This contributes positively to public
health by reducing the spread of waterborne diseases. The health benefits extend
beyond those directly involved in the campaign to the broader community, creating
positive spillover effects on healthcare costs and overall well-being.

2. Tourism and Aesthetics: A cleaner and more aesthetically pleasing environment has
positive externalities on tourism. Improved cleanliness enhances the attractiveness of
cities and tourist destinations, attracting more visitors. The economic benefits derived
from increased tourism contribute to the overall well-being of the community.
 3. Community Development: Swachh Bharat Abhiyan involves community engagement
and participation. The empowerment of local communities through awareness
programs, cleanliness drives, and skill development generates positive spillover effects
on community development. Improved community infrastructure and well-being
benefit not only the immediate participants but also neighbouring areas.

4. Environmental Preservation: Cleanliness initiatives contribute to environmental

preservation. Reduction in open defecation and proper waste disposal lead to a healthier
ecosystem. The positive externalities extend to ecosystems beyond the immediate
vicinity, contributing to broader environmental sustainability.

Negative Externalities of Swachh Bharat xaAbhiyan:

1. Disposal Challenges: The campaign's emphasis on waste disposal may lead to

challenges in managing and disposing of the increased volume of waste. Improper
disposal practices may result in negative externalities, such as pollution and
environmental degradation if waste management infrastructure is not adequately
developed.

2. Opportunity Costs: Resources allocated to Swachh Bharat Abhiyan involve opportunity

costs—the value of alternative uses for these resources. While the campaign aims for
positive social and environmental outcomes, the foregone opportunities in other sectors
might be considered negative externalities. Evaluating trade-offs and ensuring efficient
resource allocation is essential.