When free riders are present in a market, the market generally fails to provide the efficient outcome.
The correct answer and explanation is :
Correct Answer:
True – When free riders are present in a market, the market generally fails to provide an efficient outcome.
Explanation:
A free rider is an individual who benefits from a good or service without paying for it. This problem commonly arises with public goods, which are non-excludable (people cannot be prevented from using them) and non-rivalrous (one person’s consumption does not reduce availability for others). Classic examples include national defense, street lighting, and clean air.
In an efficient market, resources are allocated optimally, ensuring that supply meets demand at the right price. However, when free riders exist, producers lack the incentive to supply the good because they cannot charge all beneficiaries. This leads to market failure, where the socially optimal quantity of the good is not provided.
For instance, consider public parks. If a private company builds and maintains a park, but people can use it without paying, few individuals may voluntarily contribute to its upkeep. As a result, the company may underprovide or not provide the park at all, even though society benefits from it.
Governments often intervene to correct this inefficiency by providing public goods funded through taxation. In the case of environmental protection, for example, governments may impose regulations or taxes to ensure clean air and water since individuals or firms alone may not have the incentive to address pollution.
Overall, the free rider problem leads to underproduction or no production of essential goods and services, making it necessary for collective action or government intervention to achieve an efficient outcome. Without intervention, private markets fail to allocate resources effectively, leading to inefficiencies and potential welfare losses.