--%>
Assignment Help - homework help

Free rider problem

Question:

Explain why the free rider problem makes it difficult for perfectly competitive markets to provide the Pareto efficient level of a public good.

Answer:

A free rider is a person who cannot be excluded from the consumption or usage of a Public good, which is non-rivalrous and non-excludable in nature. The problem lies with the fact that these agents, the free riders, do not pay for the establishment and/or provision of the public good/property.

The free rider gains from this, as he/she gets all the gains from the good but does not have to pay anything for its provision.

Public goods have the special feature that if one person buys the good, everyone benefits from it. In this sense, the public goods have a positive externality attached to them. However, the free - rider issue leads to an undersupply of the public goods in a competitive market, as the perfectly competitive market does not take into account the externalities attached with a good.

The graph below illustrates it:

2470_free rider problem.png

In the figure, PB denotes the personal benefit curve, SB denotes social benefits, and PC denotes personal cost. The optimal provision will be Q', taking into account the positive externality, however, the market equilibrium will be at Q, which does not take into account the positive externality of the public goods.

   Related Questions in Business Economics

  • Q : Problem related to market circular flows

    In output markets, the simple circular flow model, households replace their _________ for _________. Can someone help me in determining the right answer from the given options. (1) Resources | income. (2) Labor | g

    		•
  • Q : Advantages rising from division of

    Adam Smith known three advantages rising from divisions of labor which would lead to greater economic wealth that did not include the concept that the division of labor: (w) helps every worker refine specialized skill

    		•
  • Q : How can we evaluate cost of capital How

    How can we evaluate cost of capital?

    		•
  • Q : Utilitarianism of Jeremy Bentham with

    The utilitarianism of Jeremy Bentham would clash most strongly along with the philosophic principles of: (w) the epicureans who followed the teachings of Epicurus [c. 341 to 271 BC]. (x) hedonism. (y) the Greek philosophers and mediev

    		•
  • Q : What do you mean by Linkages What do

    What do you mean by Linkages?

    		•
  • Q : Scientific method how does it relate to

    What is the scientific method and how does it relate to theoretical economics?  What is the difference between a hypothesis and an economic law or principle?

    		•
  • Q : Possession protection of property rights

    Why possession protection of property rights and private property promotes the market system?

    		•
  • Q : Economic concepts of academic subjects

    The initial “professional” university professors who taught economic concepts like academic subjects, those were: (1) cosmologists. (2) moral philosophers. (3) socio-biologists. (4) natural historians (5) logicians. (6) mathematicians. (7)

    		•
  • Q : Programs exchanged in the market For

    For the question below, utilize the given information. The market for gizmos is competitive, with an increasing sloping supply curve and a downward sloping demand curve. With no govt. intervention, the equilibrium price is $25 and the equilibrium quantity is 10,000 gi

    		•
  • Q : Production possibilities curve is a

    How a production possibilities curve is a graphical representation of choices?

    		•