--%>
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 : Explain the definition of Economics

    Explain the definition of Economics?

    		•
  • Q : Next Generation Manufacturing Strategy

    This Assignment assesses the following module Learning Outcomes:1. Describe current production concepts and techniques in formulating a manufacturing strategy.2. Discuss the development and implementation of manufacturing strategies in the busi

    		•
  • Q : Example of public goods Drinking at a

    Drinking at a public water fountain is: (w) a public good because anyone may drink from it. (x) results in a negative externality because others can’t drink from this at similar time. (y) a positive externality because you are benefiting by other’s provisi

    		•
  • 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 : What happens in the product markets

    What happens in the product markets?

    		•
  • Q : Different types of leverages in

    Write down the different types of leverages which are computed for financial analysis?

    		•
  • Q : Briefly state the pros and cons of

    Briefly state the pros and cons of Partnership?

    		•
  • Q : Recycling center Suppose you go to a

    Suppose you go to a recycling center and are paid 25 cents per pound for your aluminum cans.  However, the recycler charges you $.20 per bundle to accept your old newspapers.

    		•
  • Q : Government Pegged Currencies Question:

    Question: If a government pegs the value of its currency to another currency, the government must stand ready to i. _________________________ the "hard" currency to defend the pegged value of its own currency. ii.

    		•
  • Q : Problem on private resource ownership

    Relative to most of the other countries, the United States encompasses historically relied more greatly on: (1) Public resource ownership and private income distribution. (2) Decentralized decision making and private resource ownership. (3) Exports of textiles, automo

    		•