Question

Public goods are underproduced in a competitive market because the free-rider problem causes which of the following?

a) Fixed supply
b) Effective price ceilings
c) Reduced market demand
d) Negative externalities
e) Increased imports

Answer 1

The correct answer is c) Reduced market demand.

Public goods are those that are non-excludable and non-rivalrous in consumption, meaning that it is difficult or impossible to exclude people from using them and that one person's use of the good does not reduce the amount available for others to use. Examples of public goods include national defense, street lighting, and clean air.