A free-rider problem arises if a good is __.
A. nonrival and nonexcludable
B. nonrival and excludable
C. rival and nonexcludable
D. rival and excludable
The correct answer and explanation is :
Correct Answer:
A. nonrival and nonexcludable
Explanation:
The free-rider problem occurs when individuals can benefit from a good or service without paying for it, leading to under-provision or inefficiency in its production. This problem arises primarily in the case of public goods, which are nonrival and nonexcludable.
- Nonrivalry means that one person’s consumption of the good does not reduce its availability for others. For example, if a person listens to a public radio broadcast, it does not prevent others from doing the same.
- Nonexcludability means that people cannot be prevented from using the good, even if they do not pay for it. For instance, national defense protects all citizens, regardless of whether they contribute to its funding.
Since individuals cannot be excluded from using public goods, many may choose not to pay for them, expecting others to cover the cost. This leads to market failure, as private firms have little incentive to produce these goods, knowing they cannot charge consumers directly. As a result, public goods are typically provided by governments, funded through taxation.
Why Other Options Are Incorrect:
- B. Nonrival and excludable: These are club goods (e.g., subscription TV services), where free riding is less of an issue since providers can charge fees.
- C. Rival and nonexcludable: These are common resources (e.g., fish in the ocean). The issue here is overuse rather than free-riding.
- D. Rival and excludable: These are private goods (e.g., food, clothing), where consumers must pay to consume them, preventing free-riding.
Thus, the free-rider problem specifically arises when a good is nonrival and nonexcludable, making public goods susceptible to underfunding and overuse.