Hello!

We are Miko, Marcie & Ferds

We’re here to present about Market and Network
Externalities; Public Goods and the Tragedy of the
Commons

You can find us at @miksmiks9090, @marcolimPH

@ferds_24
1
 MARKET AND NETWORK
EXTERNALITIES
PUBLIC GOODS AND THE TRAGEDY OF
THE COMMONS
ENERGIZER
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 MARKET AND NETWORK
EXTERNALITIES
PUBLIC GOODS AND THE TRAGEDY OF
THE COMMONS
At the end of the lesson, you are able to:

● Understand the externalities, public goods and the

Tragedy of the Commons

● Understand how these market failures affect efficiency

of the market outcome

● Solve the market failures

 PRINCIPLE 7
“In the absence of How markets allocate
“Markets are usually a
market failures, scarce resources with the
good way
the competitive market force of supply and
to organize economic
outcome is efficient, demand
activity.”
maximizes total
surplus.”
 EXTERNALITY
arises when a person engages in an activity that influences
the well-being of a bystander and yet neither pays nor receives
any compensation for that effect

INTERNALIZE THE EXTERNALITY

PRINCIPLE NO. 5 PRINCIPLE NO. 7

“People respond to “Governments can
incentives.” sometimes
improve market
outcomes.”
 EXTERNALITY

POSITIVE EXTERNALITY NEGATIVE EXTERNALITY

More educated population Air Pollution from factories

Solution: Impose a tax on the

Solution: to subsidize
firm equal to the
cost of education
external cost of the pollution it
generates
SOLUTIONS:

Command-and-Control Market-based
policies policies
 NETWORK EXTERNALITIES

Communications network Locational network

The more users that join a
communications network the better for Locating together
the existing users/suppliers
benefits from being able to contact
more users, economies of scale,
 PUBLIC GOODS
● one person’s use of a public good does not
reduce another person’s ability to use it

The government,
however, can potentially
remedy the problem. If
the government decides
that the total benefits of
a public good exceed its
costs, it can provide the
public good, pay for it
with tax revenue, and
make everyone better National Defense Clean Air
off.
 THE TRAGEDY OF THE COMMONS
● A theory founded by Garret Hardin (1968).
● Exists when a common resource is ruined or depleted.

“We can avoid

tragedy only by
Limited Natural Environmental
altering our values.”
Hardin, 1968 Resources Degradation
 THE TRAGEDY OF THE COMMONS

As our story begins, the sheep spend much of their time grazing on the land
surrounding the town, called the Town Common. No family owns the land. Instead, the
town residents own the land collectively, and all the residents are allowed to graze their
sheep on it. Collective ownership works well because land is plentiful. As long as
everyone can get all the good grazing land they want, the Town Common is not rival in
consumption, and allowing residents’ sheep to graze for free causes no problems.
Everyone in town is happy.
As the years pass, the population of the town grows, and so does the number of
sheep grazing on the Town Common. With a growing number of sheep and a fixed
amount of land, the land starts to lose its ability to replenish itself. Eventually, the land is
grazed so heavily that it becomes barren. With no grass left on the Town Common,
raising sheep is impossible, and the town’s once prosperous wool industry disappears.
Many families lose their source of livelihood.
 RIVAL IN CONSUMPTION?
YES NO
EXCLUDABLE?

COMMON RESOURCES PUBLIC GOODS

NO FISH IN THE OCEAN CLEAN AIR

ENVIRONMENT TORNADO SIREN

 CONCLUSION

In some cases, people can solve the problem of externalities on their own.

When people cannot solve the problem of externalities privately, the

government often steps in.

Governments pursue various policies to remedy the inefficiencies caused by

externalities.

Goods differ in whether they are excludable and whether they are rival in
consumption. A good is excludable if it is possible to prevent someone from
using it. A good is rival in consumption if one person’s use of the good
reduces other people’s ability to use the same unit of the good.
 SEATWORK

1. What is the usual activity organized in the market?

2. What happen to the market if there is no existence of market failures?
3-4. What are the two factors considered in the market in
allocating the scarce resources?
5-8. In positive views of market externalities what are the cause and effect?
How about in negative aspect?
9. Solution for market externalities.
10. Example of public goods.
11. Cause of tragedy of the commons.
12. Example of network externalities.
13. What do you call the consumption by one person does not exclude
consumption by others?
14. Who is the founder of “Tragedy of the Commons?”
15. What do you call the existence of depletion of common resources?
ANSWER KEY
1. A. Economic Activity
2. A. Efficient Outcomes/ Efficiency
3. A. Demand
4. A. Supply
5. A. Subsidized cost of education
6. B. more educated population
7. B. Factory Pollution
8. B. imposition of tax equal to pollution generate
9. B. Command and Control Policies/ market-based Policies
10. B. National Defense/ Clean Air
11. C. Limited Natural Resources/ Environmental Degradation
12. C. Communications Network/ Locational Network
13. C. Public goods
14. C. Garret Hardin
15. C. Tragedy of the Commons
REFERENCES:

● Principles of Macroeconomics by N. Gregory Mankiw

(Book)

● https://www.youtube.com/watch?v=bs8OKEWpEK4 (video)