Question

Why are public goods not typically allocated efficiently in the market?

a) Public goods lack rivalry in consumption and are non-excludable, causing free ridership and market failure in providing them efficiently.
b) Public goods are over-allocated due to excessive government intervention, leading to inefficiencies in resource allocation.
c) Public goods are not demanded by consumers, causing surplus production and inefficiency in the market.
d) Public goods face high competition in the market, leading to price wars and inefficient allocation.

Answer 1

Public goods are inefficiently allocated in the market due to their non-excludable and non-rival nature, which leads to the free rider problem. To combat this, several measures like government actions and social pressures are used to ensure cost contribution from users.

Step-by-step explanation:

Public goods are not typically allocated efficiently in the market because of their non-excludable and non-rivalrous characteristics. These traits lead to the free rider problem, where individuals can benefit from goods or services without having to pay for them. For instance, it's difficult to prevent someone from using a road - making the good non-excludable. Additionally, one more vehicle on the road doesn't usually prevent others from also using it, illustrating non-rivalry. Market failure occurs as private companies find it challenging to charge for these goods, resulting in less than the socially optimal amount being produced.

To address the free rider problem, solutions such as government intervention, social pressures, and unique market mechanisms have been implemented. These measures aim to ensure that the users of public goods contribute to their cost. However, in natural market conditions, without these measures, public goods are not efficiently allocated.