The puzzle the economists were struggling to solve

The puzzle the economists were struggling to solve - goods,...

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The puzzle the economists were struggling to solve. Problems - People may have incentives to hide their true preferences for a public good - If Adam can get Eve to pay for the public good, he can use his income for other purposes and still enjoy the public good. - This incentive to lets other pay for the public good while still enjoying the benefits is called “free rider problem”. Free Rider Problem - Simply, it means consumers generally have little incentive to pay for goods that they can get free. - As the group size increase, it is more likely that everyone will behave like a free rider, and the public good will not be provided. - If enough people behave like free rider, the public good will not be built. - Most economists hold that the market will fail to produce non- excludable public
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Unformatted text preview: goods, or at least fail to produce them at a desired level because of free riders.-The free rider problem happens because the public good is non-excludable Solution for Free Rider Problem-Taxation- The government can serve as the coordinating agency by collecting revenue from individuals in the form of taxes and then providing the good.-Size- the smaller the group the more likely it will overcome the free-riding because of lower organizational cost, bigger impact of individual contribution, and larger per capita benefit.-Appealing to people’s altruism; asking for donations if you enjoy using public good. There will be many free rider who don’t make donation, but -Making a public good private- making people to pay for entrance like bay bridge...
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This note was uploaded on 11/29/2010 for the course SOM 306 taught by Professor Shruti during the Spring '10 term at George Mason.

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