Ubuntu – Is it possible for /etc/hosts to include a file from the home directory

Yes to do what you need you simply need to change the xdg configuration for each existing user like so:

~/.config/user-dirs.dirs

XDG_DESKTOP_DIR="$HOME/Desktop"
...
XDG_MUSIC_DIR="/home/common/Music"
XDG_VIDEOS_DIR="$HOME/Movies"

And to make this something available to all users created simply edit this:

/etc/xdg/user-dirs.defaults

DESKTOP=Desktop
...
MUSIC=../common/Music
VIDEOS=Videos

To modify the permissions, this bit is tricky because you need to make sure that all files created in these directories remain editable by everyone. I found this interesting guide on the subject:

http://www.centos.org/docs/2/rhl-rg-en-7.2/s1-users-groups-private-groups.html

Which suggests doing the following to make the permissions sticky as well as adding the users all to a common group:

chown nobody:users /home/common
chmod 2775 /home/common
usermod -a -G users user1

You may want to change the umask setting to allow all files created to be modifiable by the anyone in the users group in that directory, edit /etc/profile and go to the bottom and change umask 022 to umask 002 This is considered secure since all users have their own primary user and really only effects shared directories like this one you want to make.

Let us know if it works well enough.

The file /etc/nsswitch.conf will let you reconfigure the order of the name resolution. By default, the host file is the first, then the configured DNS. There could be more options.

The file /etc/hosts only lists IP addresses and hostnames (multiple names for one IP if you want)

The file /etc/resolv.conf will list the default search domains, and will also list in sequence the name servers to use.