📚 Learning Guide
Public Goods and Free Rider Problem
hard

In the context of public goods, how does the free rider problem complicate cost-benefit analysis when evaluating whether to provide a public good?

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Choose the Best Answer

A

It makes it easier to determine the demand for the good.

B

It leads to overestimation of the benefits since individuals do not pay.

C

It eliminates the need for considering externalities.

D

It guarantees that all individuals will contribute to funding the good.

Understanding the Answer

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Answer

Public goods are things that everyone can use, like clean air or national defense, and they are usually paid for by the government or community. The free rider problem happens when people benefit from a public good without paying for it, which can make it hard to figure out how much the good is worth to society. When conducting a cost-benefit analysis, it becomes tricky to measure how much people value the good because many might not contribute, thinking they can still enjoy the benefits for free. For example, if a city wants to build a new park, some people may enjoy it without donating money for its upkeep, making it difficult to assess if the park's benefits outweigh its costs. This issue can lead to underfunding or not providing the public good at all, even if it would be valuable to the community.

Detailed Explanation

The free rider problem means some people benefit without paying. Other options are incorrect because Some might think that free riders help show how many people want the good; It’s a common mistake to think free riders mean we ignore other effects.

Key Concepts

Cost-benefit analysis
Externalities
Public versus private goods.
Topic

Public Goods and Free Rider Problem

Difficulty

hard level question

Cognitive Level

understand

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