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HomeHomework HelpeconomicsPublic Goods and Free Rider Problem

Public Goods and Free Rider Problem

Public goods are products that are non-excludable and non-rivalrous, meaning that their consumption by one individual does not reduce availability for others. The free rider problem occurs when individuals benefit from resources, goods, or services without paying for them, leading to underproduction or inefficient allocation of these goods in a competitive market. Understanding this concept is crucial for students as it highlights the challenges private firms face in providing public goods and the implications for government intervention in the economy.

intermediate
2 hours
Economics
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Overview

Public goods are essential resources that everyone can use without depleting them, such as clean air and national defense. However, the free rider problem arises when individuals benefit from these goods without contributing to their cost, leading to under-provision and inefficiencies in the market....

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Key Terms

Public Goods
Goods that are non-excludable and non-rivalrous.

Example: National defense is a public good because everyone benefits from it.

Free Rider Problem
A situation where individuals benefit from resources without contributing to their cost.

Example: People enjoying a public park without paying taxes.

Non-excludability
A characteristic of public goods where individuals cannot be excluded from using them.

Example: Clean air is available to everyone, regardless of payment.

Non-rivalry
A characteristic of public goods where one person's use does not reduce availability for others.

Example: One person's enjoyment of a fireworks display does not diminish another's enjoyment.

Market Failure
A situation where the allocation of goods and services is not efficient.

Example: Public goods often lead to market failure due to free riding.

Taxation
The process of collecting money from individuals to fund public goods.

Example: Taxes are used to fund public education.

Related Topics

Externalities
Effects of a transaction that impact third parties not involved in the transaction.
intermediate
Common Resources
Resources that are available to all but can be depleted, like fisheries.
intermediate
Public Choice Theory
The study of how public decisions are made and the role of self-interest.
advanced

Key Concepts

Public GoodsFree Rider ProblemNon-excludabilityNon-rivalry