the difference between public goods and private goods, why markets might not adequately provide public goods and the concept of the free rider problem

Question 1

Excludability

Answer 1

• when a good is supplied, it is possible to exclude other individuals from deriving a benefit

Question 2

Rival

Answer 2

• if a good is consumed by one individual, another individual cannot consume it

Question 3

Public goods

Answer 3

• non-rival/non-excludable
• law enforcement, national defense, street lights, lighthouses
• once provided, the MC = 0 –> consumer
• always government provision

Question 4

Free Rider Problem

Answer 4

• anyone can benefit from the provision of public goods without paying for it
• $ of public good = 0 –> no incentive for firms to provide –> no market formation –> complete market failure as there is a missing market
• FRP leads to overconsumption and even exhaustion/destruction of the good

Question 5

Private Goods

Answer 5

• rival/excludable
• consumers who aren’t able to pay for private goods can easily be refused access
• a person who buys a private good, prevents another person from buying or benefiting from the exact same time