Final answer:
Market economies underproduce public goods primarily due to free-riding incentives. As individuals can consume public goods without paying because of their nonexcludable and non-rival nature, there is less motivation for private firms to produce these goods, leading to underproduction.
Step-by-step explanation:
Why Market Economies Underproduce Public Goods
Market economies tend to underproduce public goods for a variety of reasons associated with the nature of these goods. A public good has the key characteristics of being nonexcludable and non-rival. Nonexcludable means it is difficult or costly to prevent non-payers from using the good, and non-rival indicates that one person's use doesn't diminish the ability of another to use it. This leads to the free rider problem, where individuals consume the good without contributing to its cost.
Among the options provided, a) Free-riding incentives is the correct reason as to why market economies underproduce public goods. Since it is problematic to exclude non-payers and one person's consumption doesn't prevent another's, there is little motivation for individuals to pay if they can benefit without doing so. Consequently, private firms lack motivation to produce public goods when they cannot ensure that only paying consumers will benefit, leading to underproduction.
Government actions such as taxation and public provision are commonly used solutions to this problem. Additionally, social pressures and unique market mechanisms can sometimes help alleviate the issue, ensuring that public goods are provided despite the challenges.