The problems associated with managing a common-pool resource can lead to externalities. An externality occurs whenever the actions of an individual affect another individual as well themselves. They are also commonly referred to as "third-party effects" and can either help or hinder the third-party depending on whether or not the externality is classified as a positive or negative externality.
- A positive externality will occur whenever an individual's marginal benefit for taking an action is exceeded by the marginal benefit to society when that individual takes the action.
For instance, education is often thought of as having a positive externality. The individuals marginal benefit for receiving an education translates into higher wages and increased quality of life, whereas the marginal benefit to society is increased overall productivity which may exceed the individuals marginal benefit of education. This is an argument for why it is rational for society to subsidize public education.
- A negative externality occurs whenever the marginal cost of an individual's action is less than the marginal cost that society incurs for the individual taking that action.
An excellent example of this is the dumping of industrial waste into a waterway. The marginal cost for a firm to dump in a river, assuming no legal ramifications, is extremely low. However, the marginal cost to society becomes very high when one adds up the the cost of clean drinking water and the environmental damage incurred. In general, many of the externalities associated with common-pool resources are negative.
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