--%>
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 : Free rider problem Question: Explain

    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:

    		•
  • Q : Characteristics of Perfectly

    Perfect competition is characterized by all of the following except w) heavy advertising by individual sellers. x) homogeneous products. y) sellers are price takers. z) a horizontal demand curve for individual sellers.

    Q : Contestable Markets The least probable

    The least probable of the given industries to be a contestable market is: (1) video rentals. (2) pizza delivery. (3) cable television. (4) trucking. Can someone explain/help me with best solution about problem of <

    		•
  • Q : Explain of the law of demand Explain of

    Explain of the law of demand?

    		•
  • Q : Checkout problem A grocery store chain

    A grocery store chain is considering ways to improve the performance of the waiting lines at their checkout stands. A heavily trafficked checkout stand is monitored for 120 min. In that period, 60 customers have their groceries rung up, and depart from the store. The

    		•
  • Q : Introduction of the term net present

    Give a brief introduction of the term net present value? Write down its admittable rules, their merits and demerits?

    		•
  • Q : Competitive market economy will make

    Briefly explain how the competitive market economy will make the needed adjustments to reestablish an efficient allocation of society’s scarce resources?

    		•
  • Q : Nature and Scope of Economics Nature

    Nature and Scope of Economics: Introduction Economics is a social science that

    		•
  • Q : Best illustration of a perfectly

    Which of the given is the best illustration of a perfectly competitive industry: w) wheat production. x) steel production. y) electricity production. z) airplane production. Hey friends please give your opinion for

    		•
  • Q : What are the dependencies in U.S. and

    What are the dependencies in U.S. and World Trade?

    		•