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

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

• A. Higher production costs
• B. Reduced market demand
• C. Excludability is difficult to enforce
• D. Private provision is too unreliable

Answer: (B)

Public goods are non-excludable and non-rivalrous, so people can benefit without paying. Because you can’t reliably charge each user, individuals have an incentive to free-ride, hoping others will pay for the good. In a competitive market, this undermines the price signal and the incentive to supply, so the good is underproduced. The root issue is that excludability is difficult to enforce—private providers can’t easily charge only those who benefit, so the market underprovides despite high social value. The other options don’t capture this mechanism: higher production costs aren’t caused by the free-rider problem, a reduced market demand misreads the issue as a lack of willingness to pay overall, and private provision being unreliable isn’t the fundamental reason the market fails to supply public goods.

Public goods are non-excludable and non-rivalrous, so people can benefit without paying. Because you can’t reliably charge each user, individuals have an incentive to free-ride, hoping others will pay for the good. In a competitive market, this undermines the price signal and the incentive to supply, so the good is underproduced. The root issue is that excludability is difficult to enforce—private providers can’t easily charge only those who benefit, so the market underprovides despite high social value. The other options don’t capture this mechanism: higher production costs aren’t caused by the free-rider problem, a reduced market demand misreads the issue as a lack of willingness to pay overall, and private provision being unreliable isn’t the fundamental reason the market fails to supply public goods.