OxfordAQA International AS and A-level Economics: Public goods and externalities (9640) – Revision Notes

Short-form recall for 3.1.5.1, 3.1.5.2 and 3.1.5.3 of OxfordAQA’s International AS and A-level Economics course (9640), specification version 1.2: what market failure means, private, public and quasi-public goods, and externalities. Section 3.1 belongs to the International AS, and the A-level extends it. The study guide has the full explanations, and the practice questions. Also see the OxfordAQA A-level Economics hub and checklist. A free 10-minute diagnostic shows weak spots. Related reading: the operation of markets. All figures are invented and illustrative.

Key definitions

Term	Meaning
Misallocation of resources	Resources used in a way that does not give society the greatest benefit
Market failure	The market outcome misallocates resources
Private good	Rival and excludable
Pure public good	Non-rival and non-excludable
Quasi-public good	Meets only part of the public-good description
Free rider	Enjoys a good without paying
Tragedy of the commons	Shared, open-access resource overused because each user ignores the cost to others
Externality	Cost or benefit to a third party, with no payment
Private cost or benefit	Falls on the buyer or seller in the transaction
Social cost or benefit	Private plus external
Property rights	Legal power to use a resource and to exclude others

Causes of market failure (names only here)

The specification lists: public goods, positive and negative externalities, merit and demerit goods, monopoly and other market imperfections, and inequality of income and wealth. Be ready with one example of each. Only the first three causes are in these notes.

Public goods in a few lines

• Non-rival: my use leaves your share intact.
• Non-excludable: you cannot stop non-payers.
• Non-excludability means no revenue, so private firms do not supply. This is why it matters most.
• Free-rider problem: everyone waits for someone else to pay, so a worthwhile good is not provided.
• Examples: street lighting, flood defences, national defence.
• Quasi-public: partly rival or partly excludable, such as a road that becomes congested or tolled.
• Technology: encryption made broadcasts excludable, so they can be sold as a private service.

Spectrum sketch

Private good  ->  Quasi-public  ->  Pure public good
(rival,           (partly rival,    (non-rival,
 excludable)       partly excl.)     non-excludable)

Tragedy of the commons

1. A resource is open to all (non-excludable) but each use reduces what remains (rival).
2. Each user keeps the full gain from extra use and shares the cost.
3. Everyone expands use, and the resource is overused or exhausted.

Criticisms: users can agree rules; shared ownership is not the same as open access; people are not always selfish; solutions may be costly to enforce; severity depends on how fast the resource renews.

Externalities: method in steps

1. Draw demand and supply. Mark the private equilibrium.
2. Decide which curve carries the externality. Production externality: supply curve. Consumption externality: demand curve.
3. Move that curve by the external amount. Direction: negative production, supply above; positive production, supply below; negative consumption, demand below; positive consumption, demand above.
4. Mark the social equilibrium and compare quantities.
5. State the result: negative means overproduction or overconsumption; positive means underproduction or underconsumption.
6. Shade the welfare loss triangle between the private and social quantities.

The specification says you are not required to use MSC and MSB diagrams.

Type	Social curve vs private	Quantity in a free market
Negative production	Social supply above	Too high
Positive production	Social supply below	Too low
Negative consumption	Social demand below	Too high
Positive consumption	Social demand above	Too low

Worked reminder 1: negative consumption externality

Private demand: P = 50 − 0.5Q. Supply: P = 10 + 0.5Q. External cost of consumption: 8 per unit (illustrative).

• Private equilibrium: 50 − 0.5Q = 10 + 0.5Q, so Q = 40 and P = 30.
• Social demand is 8 lower: P = 42 − 0.5Q. Set equal to supply: 42 − 0.5Q = 10 + 0.5Q, so Q = 32 and P = 26.
• Overconsumption = 40 − 32 = 8 units.
• At Q = 40 the last unit costs 30 to supply, and is worth 30 to the buyer but only 22 to society.
• Welfare loss = ½ × 8 × 8 = 32.

Worked reminder 2: positive production externality

Demand: Qd = 84 − 2P. Private supply: Qs = 3P − 6. Each unit made gives other firms a benefit of 5 (illustrative).

• Private equilibrium: 84 − 2P = 3P − 6, so P = 18 and Q = 48.
• Social supply is 5 lower: Qs = 3(P + 5) − 6 = 3P + 9. Then 84 − 2P = 3P + 9, so P = 15 and Q = 54.
• Underproduction = 54 − 48 = 6 units.
• At Q = 54 the supplier needs a price of 20, buyers pay 15 and society’s net cost is 20 − 5 = 15.
• Welfare gain = ½ × 5 × 6 = 15.
• Price falls by 3, which is 16.7%.

Worked reminder 3: free-rider arithmetic

A town of 15 households each values a footbridge lamp at 3. It costs 36 (illustrative).

• Total benefit = 15 × 3 = 45.
• Net benefit = 45 − 36 = 9, so providing it improves welfare.
• An equal share is 36 ÷ 15 = 2.4 each, leaving 0.6 net per household.
• Nobody will fund all 36 for a benefit of 3, and each hopes the others will pay. The good is not provided, a misallocation.

Describing a diagram in words

Model sentence for a negative production externality: “The private supply curve crosses demand at the market quantity. Because the firm ignores the external cost, the supply curve showing the full cost to society lies above it. Its crossing with demand has less output and a dearer price. The distance between the two outputs is overproduction, and the triangle between the curves over that gap is the welfare loss.” Swap the curve and direction for each of the other three cases.

Property rights

• Missing or unenforceable rights mean no one can charge for pollution or be paid for benefits.
• Common cases: rivers, air, open seas, shared grazing.
• Clearer ownership may help, but it is hard where harm is spread widely or hard to trace.

Must-know distinctions

• Public good or public provision? A public good is defined by its features. Provision by the state is a policy choice.
• Open access or common ownership? The tragedy follows open access.
• Complete or partial failure? Pure public goods: no private supply. Externalities: wrong quantity.
• Production or consumption externality? Ask who creates the spillover, the maker or the user.
• Private or social? Markets use private values only.

Evaluation prompts

• How large is the external cost or benefit compared with the price?
• Can it be measured in money?
• Do effects arrive now or years later?
• Is the good fully public or only partly?
• Who gains and who loses if the misallocation continues?

Quick self-test

1. What does market failure mean?
2. Give the two features of a pure public good.
3. Why does non-excludability stop private firms supplying?
4. Give one example of a quasi-public good and say why it is quasi-public.
5. A village of 10 households each values a clock at 4. It costs 34. Should it be provided?
6. Give one criticism of the tragedy of the commons theory.
7. Private equilibrium is 40 units at 30. A negative consumption externality of 8 shifts social demand down. Social quantity is 32. What is the overconsumption as a percentage of the social quantity?
8. Which curve is shifted for a positive production externality, and which way?
9. Why does the absence of property rights cause externalities?
10. At a quantity of 54 a good costs 20 to supply, buyers pay 15 and external benefit is 5. What is society’s net cost?

Answers

1. A market leads to a misallocation of resources.
2. Non-rival and non-excludable.
3. Non-payers cannot be stopped, so there is no way to earn revenue.
4. A toll road: non-rival when quiet, but excludable through tolls, and rival when congested.
5. Total benefit = 10 × 4 = 40, which exceeds the cost of 34, so yes. Net benefit = 6.
6. Any one: users can agree rules; ownership may be shared not open; people are not always self-interested; enforcement can be costly.
7. (40 − 32) ÷ 32 = 25%.
8. The supply curve, downward (rightward).
9. Nobody has a legal claim to charge for harm or collect for benefit, so costs and benefits fall on outsiders.
10. 20 − 5 = 15.

Where marks are usually lost

• Writing that a public good is one the state provides, which describes a policy and not the good.
• Giving only one of the two features, or giving “non-excludable” with no consequence.
• Writing “externality” without saying who the third party is.
• Shifting the wrong curve, or shifting it in the wrong direction.
• Not labelling both equilibria, so the over- or underproduction cannot be seen.
• Leaving out the welfare-loss area, or shading it on the wrong side.
• Describing the free-rider problem with no link to a missing market.
• Giving the tragedy of the commons with no criticism when asked to evaluate.
• Ending with a statement of the problem and no judgement on its size or importance.

Official syllabus

Source: the specification for OxfordAQA’s International AS and A-level Economics course, code 9640, version 1.2. First teaching was September 2020, the first AS exams were May/June 2021 and the first A-level exams were May/June 2022. Covered here: 3.1.5.1, 3.1.5.2 and 3.1.5.3.