Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

2. Public Goods: 
These are the goods that can be consumed collectively - that 
is jointly and indivisibility 
– by a society as a whole. It is the goods 
that either will not be supplied by the market or, if supplied, will be 
supplied in insufficient quantity. A public good is not a rival in 
consumption. 
There are two related characteristic of Public Goods: 
1. Non-rivalry in consumption 
– one person can increase his 
satisfaction from the commodity without reducing that 
obtained by others. Ex. Ships passing a lighthouse do not 
lessen the utility gained by the other ships benefiting from it. 

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2. Non-excludability 
– there is no (possible) way of excluding 
from gaining the benefits of a pure pubic good. For example 
National Defense. 
 
3. Externalities 
It is the activity of one person/firm affecting the welfare of 
another in a way that is outside the market. In the presence of an 
externality, the market may fail to allocate resources efficiently. 
There are two kinds of externality 
1. Positive externality, where one firm/person actions benefit 
on the other firms/person. Example, I plant a beautiful flower 
garden in front of my house, my neighbors may benefit from 
being able to look at it. An individual who rehabilitates his 
house in a neighborhood that is decline may confer a 
positive externality on his neighborhood. 
2. Negative externality, where one firm imposes a cost on the 
other firms but does not compensate them. Example is air 
and water pollution; when I drive a car that is not equipped 
by pollution control device, I lower the quantity of air and 
thus impose a cost on others. Similarly, a chemical plant that 
discharges chemicals into a nearby stream imposes cost on 
downstream user of water, may have to spend considerable 
amount money to clean up the water to make it usable. 
Therefore without the government intervention, the level of 
pollution would be too high.