A free-rider problem arises when a good is

A free-rider problem arises when a good is

• A. Excludable
• B. Rival but excludable
• C. Nonrival and excludable
• D. Nonexcludable

Answer: (D)

The situation that creates a free-rider problem is when a good is nonexcludable. If you can’t easily prevent someone from using the good, people have little incentive to pay for it themselves because they can still enjoy the benefit even if they don’t contribute. That makes private markets underprovide the good, since producers can’t charge all beneficiaries. Think of national defense or clean air: once the service or benefit exists, you can’t exclude people from enjoying it, and each person has a motive to wait for others to pay. If a good is excludable, you can charge users and prevent nonpayers from accessing it, so the free-rider problem doesn’t arise in the same way. If it’s rival but excludable, it’s a private good where market pricing works to allocate resources. If it’s nonrival and excludable, you can often manage provision by charging and limiting use (club goods). So nonexcludability is the key property that generates the free-rider incentive.

The situation that creates a free-rider problem is when a good is nonexcludable. If you can’t easily prevent someone from using the good, people have little incentive to pay for it themselves because they can still enjoy the benefit even if they don’t contribute. That makes private markets underprovide the good, since producers can’t charge all beneficiaries. Think of national defense or clean air: once the service or benefit exists, you can’t exclude people from enjoying it, and each person has a motive to wait for others to pay.

If a good is excludable, you can charge users and prevent nonpayers from accessing it, so the free-rider problem doesn’t arise in the same way. If it’s rival but excludable, it’s a private good where market pricing works to allocate resources. If it’s nonrival and excludable, you can often manage provision by charging and limiting use (club goods). So nonexcludability is the key property that generates the free-rider incentive.