Consider the following statements regarding Public Goods and Externalities: 1. Non-rivalry and non-excludability are two characteristics of Public Goods 2. Market can provide the optimal amount of a good in the presence of externalities Which of the statements given above is/are correct?

Statement 1 is correct as public goods are defined by two primary characteristics: non-rivalry and non-excludability [1][2]. Non-rivalry means one person's consumption does not reduce availability for others, while non-excludability means it is impossible or unfeasible to prevent non-payers from using the good [1][3]. Statement 2 is incorrect because externalities represent a form of market failure [4]. In the presence of externalities, the free market fails to account for the social costs or benefits, leading to an inefficient distribution of resources rather than an optimal amount [4]. Because individuals do not face the full social impact of their actions, the market outcome deviates from the welfare-maximizing allocation. Consequently, government intervention through taxes, subsidies, or regulations is often required to correct these distortions and achieve social optimality [4].

Sources

1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 9: Subsidies > 9.1 Introduction > p. 284
2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Debt > p. 81
3. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Allocation Function of Government Budget > p. 67
4. [4] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 16: Terminology > 16 Terminology > p. 458