Managing Common Pool Resources
Market Failure: Externalities and Common Pool Resources
AO2·AO4
Syllabus requirement
Government and community-based solutions including collective self-governance, international agreements, and enforcement strategies.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Summary
This topic explains how externalities and common-access resources cause markets to produce the wrong quantity from society’s point of view, and why government intervention may be needed. It distinguishes private and social marginal benefits and costs, shows how merit goods generate positive externalities while demerit goods generate negative externalities, and describes the welfare losses from under- or over-production/consumption. Understanding these ideas is necessary for evaluating policies that correct market failure.
