What is a public good and why is it underprovided in a free market?

What is a public good and why is it underprovided in a free market?

• A. A good that is excludable and rival; underprovided due to monopoly.
• B. A good that is non-excludable and non-rival; underprovided due to the free-rider problem.
• C. A good that is excludable and non-rival; underprovided due to taxation.
• D. A private good; underprovided due to externalities.

Answer: (B)

Public goods have two key features: they are non-excludable and non-rivalrous. That means you can’t easily prevent people from using them, and one person’s use doesn’t reduce another’s. In a free market, private providers can’t easily charge all benefiting individuals, so many potential users have an incentive to free-ride—enjoying the good without paying. With scarce incentive to pay, firms underproduce the good relative to what would be best for society. That’s why governments typically step in, funding or providing public goods through taxes to reach the efficient level. Examples include national defense and street lighting. The other options describe different kinds of goods or misattribute the reason for underprovision, which doesn’t fit the public-good case.

Public goods have two key features: they are non-excludable and non-rivalrous. That means you can’t easily prevent people from using them, and one person’s use doesn’t reduce another’s. In a free market, private providers can’t easily charge all benefiting individuals, so many potential users have an incentive to free-ride—enjoying the good without paying. With scarce incentive to pay, firms underproduce the good relative to what would be best for society. That’s why governments typically step in, funding or providing public goods through taxes to reach the efficient level. Examples include national defense and street lighting. The other options describe different kinds of goods or misattribute the reason for underprovision, which doesn’t fit the public-good case.