Question

Why are public goods difficult for markets to allocate efficiently?

a.The structure of incentives is such that markets will encourage individuals to undertake activities that are inconsistent with economic efficiency.
b.The availability of a good to one consumer does not reduce its availability to others
c.It is difficult to restrict the consumption of public goods to those who pay
d.It is difficult to provide consumers with full information about public goods

Answer 1

Markets struggle to efficiently allocate public goods due to the free rider problem and characteristics of non-excludability and non-rivalry, often leading to underproduction and the necessity for government intervention.

Step-by-step explanation:

Public goods are difficult for markets to allocate efficiently due to several inherent characteristics. One crucial factor is the free rider problem, where individuals can benefit from goods or services without contributing to their costs, leading to underproduction as private firms find it challenging to charge users. Additionally, public goods possess the features of non-excludability and non-rivalry. Non-excludability means it is costly or impossible to prevent non-payers from using the good, while non-rivalry indicates that one person's use of a good doesn't reduce its availability to others. Market forces alone tend to underprovide public goods since they cannot easily exclude non-payers and hence, recover their costs, leading to the need for government intervention or other collective measures to ensure adequate provision.