Public goods, common-pool resources and government failure

Detail

1. Classifying goods: the two tests

• Economists sort goods using two questions.
• Rivalry: does my use reduce what is left for you? If I eat an apple, you cannot eat the same apple, so an apple is rival.

• Excludability: can people who do not pay be kept out? A cinema can stop people without tickets, so a cinema show is excludable.

• The two tests give four boxes:

	Excludable	Non-excludable
Rival	Private goods (food, clothes)	Common-pool resources (groundwater, fish, grazing land)
Non-rival	Club goods (toll roads, cable TV, gyms)	Public goods (defence, streetlights)

• Private goods: one person's use reduces another's, and the seller can charge. Markets supply these well.
• Club goods: many people can use them together, but non-payers can be kept out (for example, with a toll gate or a membership card). Private firms can supply them.
• Common-pool resources: one person's use reduces another's, but no one can easily be kept out. This leads to overuse.
• Public goods: one person's use does not reduce another's, and no one can be kept out. This leads to under-provision.
• Exam trap: the two problem boxes are both non-excludable. What separates them is rivalry.
• Public good → the problem is too little supply (free riding).
• Common-pool resource → the problem is too much use (tragedy of the commons).

2. Public goods and free riding

• Public good = a good that is both non-rival and non-excludable. Examples: national defence, streetlights, a lighthouse.
• Class 7 (Understanding Markets) says their "present use does not diminish their availability for future use". In simple words, using them today does not leave less for tomorrow.
• Free rider problem = a person enjoys a good without paying for it, because nobody can stop them.
• Why the market supplies too little of a public good:
• A private firm cannot charge people, because it cannot keep non-payers out.
• So each person hides how much they really value the good and waits for others to pay.

• Too little money is collected, and the good is under-produced or not produced at all.

• Class 9 example (The Price Puzzle), a neighbourhood park:

• The park can be built if each family pays ₹5,000.
• Each family thinks: "If others pay, I can use the park anyway."

• Too little money is collected, so the park is never built.

• Worked example (illustrative numbers):

• 100 families × ₹5,000 = ₹5 lakh, which is the cost of the park.
• Suppose only 30 families pay: 30 × ₹5,000 = ₹1.5 lakh.

• The shortfall is ₹3.5 lakh, so there is no park. All 100 families are worse off, even the 70 who "saved" ₹5,000.

• The fix: the state provides or funds public goods and pays for them through compulsory taxes. A tax removes the choice to free ride.

• Public, merit, demerit and club goods are covered in detail in the note government-budget-fiscal-policy.

3. Common-pool resources and the tragedy of the commons

• Common-pool resource (CPR) = a good that is rival but non-excludable. Examples: fisheries, groundwater, forests, village grazing land.
• Every fish I catch is one less for you (rival).
• It is hard to stop anyone from fishing in open water (non-excludable).

• So CPRs are prone to overuse and depletion.

• Tragedy of the commons (Garrett Hardin, Science, 1968) = when a shared resource is open to all, each user overuses it, even though everyone is harmed in the end.

• The logic:
• Each user gets the full benefit of using a little more.
• The cost of that extra use (a smaller fish stock, a lower water table) is shared by everyone.

• So each user's private cost is smaller than the true cost to society, and everyone over-uses.

• Worked example (illustrative numbers):

• 10 fishers share a lake. One more boat gives its owner an extra catch worth ₹1,000.
• The extra boat reduces the fish stock by ₹2,000, and this loss is shared by all 10 fishers.
• The owner's share of the loss = ₹2,000 ÷ 10 = ₹200.
• Private gain ₹1,000 > private cost ₹200, so the owner adds the boat.
• But social gain ₹1,000 < social cost ₹2,000. Society is worse off by ₹1,000.

• Every fisher reasons the same way, so the lake is overfished.

• Link: this is a negative externality. An externality is a cost or benefit that falls on people who are not part of the decision. Here, each user's action harms the other users.

4. Indian cases of the commons problem

• Groundwater overdraft in Punjab:
• Farm power is free or charged at a flat rate. So the marginal cost of pumping (the cost of pumping one more unit of water) is close to zero.
• Farmers pump until the extra water is worth almost nothing to them.

• Water tables keep falling (CGWB assessments). Punjab-specific latest data was not retrieved, so check the latest share of over-exploited blocks before quoting it.

• The national picture (Dynamic Ground Water Resource Assessment 2024, CGWB and Ministry of Jal Shakti):

• An over-exploited unit is a block where yearly groundwater extraction is more than the groundwater that can be safely extracted each year.
• 751 of 6,746 assessment units (11.1%) were classed "Over-exploited" in 2024. Assessment units are blocks, mandals or talukas [2][3].

• The share of over-exploited units fell from 17.24% (2017) to 11.13% (2024) [2][3].

• Overfishing along the coast: open access to fishing grounds leads to falling catches.

• Degraded village grazing commons: too many animals graze the shared land, and it turns barren.

5. Ostrom's answer: self-governance by communities

• Elinor Ostrom, Governing the Commons (1990). She won the Nobel Prize in Economics in 2009, shared with Oliver Williamson.
• Her main claim: Hardin's tragedy is not inevitable. Communities can manage commons well without either the state or privatisation. Privatisation means giving the resource to private owners.

• Her eight design principles for long-lasting commons institutions: 1. Clear boundaries: it is clear who may use the resource and what the resource is. 2. Rules suited to local conditions. 3. Users take part in making the rules (collective choice). 4. Monitoring of the resource and of users, by users or by people answerable to them. 5. Graduated sanctions: small punishments for a first offence and bigger ones for repeat offences. 6. Cheap and quick ways to resolve conflicts. 7. Rights recognised by the state: outside authorities accept the community's right to make rules. 8. Nested levels of governance: small local bodies sit inside larger ones, which suits large resources.

• Indian examples:

• Van panchayats in Uttarakhand (Kumaon, since the 1931 rules). These are village forest councils that manage their own forests.
• Joint Forest Management (JFM): a 1990 resolution that followed the National Forest Policy 1988. The forest department and village committees protect forests together and share the produce.
• Atal Bhujal Yojana (Atal Jal):
  • Launched in December 2019. Outlay ₹6,000 crore. Supported by the World Bank.
  • It is a community-led, demand-side groundwater scheme. Demand-side means it cuts water use instead of only finding new water [4].
  • It runs in 7 states: Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh [4][5].
  • It covers 8,203 water-stressed gram panchayats in 229 blocks/talukas of 80 districts [4][5].
  • It runs for 6 years from 1 April 2020. The aim is to stop the fall in groundwater levels through community participation [4][5].
  • Water Budgets (accounts of how much water comes in and goes out) and Water Security Plans have been prepared by all gram panchayats and are updated every year [4][5].
  • State governments carry out the measures in these plans by linking them with ongoing schemes [4][5].
• Why Atal Jal fits Ostrom: users make the rules (principle 3), monitor water levels (principle 4), and the state recognises their role (principle 7).

6. Missing markets

• Missing market = no market exists for a good or a risk, even though people value it.
• Example: clean air. No one can charge for it or buy it, so polluters do not pay for the harm they cause.

• Example: some kinds of insurance. Insurers cannot see who is risky, so they do not offer cover.

• Causes: externalities and information problems. Information problems are cases where buyers and sellers do not know the same things.

• This is the common root of Sections 6-8 (externalities, public goods and commons, information failure).

7. Government failure: the mirror of market failure

• Government failure = inefficiency caused by government intervention itself. The state's action makes the outcome worse, not better.
• Key idea: market failure alone does not prove that the state will do better. Both kinds of failure must be compared.
• Main causes:
• Poor information. The state does not know people's true costs and preferences, so it sets the wrong prices or quantities.
• Rent seeking (Anne Krueger, 1974):
  • Definition: spending resources on lobbying or on bending policy to capture gains, instead of creating new wealth.
  • Example: firms spend money and effort to get scarce import licences, not to make better products.
  • Krueger estimated licence-raj import-licence rents in India at about 7.3% of national income (1964).
• Regulatory capture (George Stigler, 1971):
  • Definition: the regulator ends up serving the industry it regulates, not the public.
  • How it happens: the industry is small and organised, while the public is large and scattered, so the industry lobbies harder.
• Unintended consequences. A policy produces side effects its makers did not foresee.

8. Limits of intervention (Class 9, The Price Puzzle)

• Price distortions (price ceiling example):
• The market price of wheat is ₹30/kg. The government caps it at ₹20/kg.
• At ₹20, farmers and traders supply less, and buyers want more.
• Result: shortage, queues and black markets.

• (A price ceiling is a legal maximum price set below the market price.)

• Compliance burdens:

• A small restaurant needs food-safety, fire, pollution and local clearances.

• Time and money spent on paperwork raise costs, which hurts ease of doing business.

• Blunted innovation:

• When returns are capped, farmers will not invest in better seeds or irrigation.

• The chain: lower reward → less investment → lower productivity over time.

• Class 7 adds that "too many rules can make it difficult for markets to function properly".

9. Evidence: Economic Survey 2019-20, "Undermining Markets: When Government Intervention Hurts"

• The chapter's main argument: government interventions, even well-meant ones, often weaken the ability of markets to create wealth [6].
• Essential Commodities Act (ECA), 1955, stock limits:
• The ECA lets the government limit how much of a commodity a trader may store (stock limits).
• The Survey found that frequent, unpredictable, blanket stock limits "neither brings down prices nor reduces price volatility". Instead they create "opportunities for rent-seeking and harassment" [6].
• NCERT scaffold case: onion (2019). Stock limits raised price volatility instead of taming it.

• The Survey argued for doing away with the ECA and similar interventions that hurt more than they help [6].

• Drug price control (DPCO 2013):

• The Drugs (Prices Control) Order is issued under Section 3 of the ECA. It regulates the prices of medicines [6].

• The Survey found that DPCO 2013 raised the prices of drugs sold through hospitals [6]. (NCERT: prices of some controlled drugs rose relative to uncontrolled ones.)

• Farm loan waivers:

• Waivers weakened credit discipline, meaning borrowers had less reason to repay on time.
• They also reduced later lending to farmers, because banks grew cautious.

Prelims Hooks

• Rival + non-excludable = common-pool resource (groundwater, fisheries). Non-rival + excludable = club good (toll road, cable TV). A common trap is to swap these two.
• Public goods are non-rival and non-excludable. The market under-supplies them because of the free rider problem.
• Tragedy of the commons was coined by Garrett Hardin in Science (1968). The self-governance answer came from Elinor Ostrom, Governing the Commons (1990). She shared the Nobel Prize in 2009 with Oliver Williamson.
• Rent seeking → Anne Krueger (1974). India's import-licence rents were about 7.3% of national income (1964). Regulatory capture → George Stigler (1971).
• Atal Bhujal Yojana: 7 states (Gujarat, Haryana, Karnataka, MP, Maharashtra, Rajasthan, UP), 8,203 gram panchayats, 80 districts, 6 years from 1 April 2020, World Bank-supported, demand-side, community-led [4][5]. Trap: Punjab is not one of the Atal Jal states.
• Dynamic Ground Water Resource Assessment 2024: 751 of 6,746 units (11.1%) over-exploited, down from 17.24% in 2017 [2][3].
• DPCO is issued under Section 3 of the Essential Commodities Act, 1955 [6].
• Joint Forest Management grew out of the 1990 resolution that followed the National Forest Policy 1988. Van panchayats in Kumaon date from the 1931 rules.

Mains Points

• Market failure vs government failure: free riding and the commons justify state action. But rent seeking, regulatory capture and poor information mean the state can also fail.

• The Economic Survey 2019-20 evidence on ECA stock limits and DPCO 2013 supports targeted, rule-based intervention over blanket controls [6].

• The third way for commons: Ostrom shows that community institutions can beat both nationalisation and privatisation.

• India applies this through van panchayats, JFM and Atal Bhujal Yojana (water budgets and Water Security Plans made by gram panchayats) [4][5].

• Policy lesson: give legal recognition, allow local rule-making and build monitoring capacity.

• Groundwater as a price-signal problem: free or flat-rate farm power makes the marginal cost of pumping zero, which drives overdraft.

• The national share of over-exploited units has improved (17.24% in 2017 → 11.13% in 2024), but hotspots remain [2][3].

• Reform options: metered power, direct benefit transfer in place of free power, crop diversification and community water budgeting.

• Regulatory design (GS-II link): to reduce capture, regulators such as CCI, SEBI and sector regulators need independence, transparency, cooling-off rules for officials, and a lighter compliance burden for small firms (ease of doing business).