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Unformatted text preview: Q0 5 Free Rider Problem Private markets will generally not provide public goods efficiently (unless the good is excludable and price discrimina1on is possible) Since the good is available to everyone once it has been provided to anyone, each person has an incen1ve to just let others pay for it The person then enjoys the goods provided through the contribu1ons of others, even though he/she did not contribute anything. If everyone behaves this way, then there will not be enough contribu1ons to pay for the efficient quan1ty This is known as the free-rider problem Game theory & the free rider problem Public Radio: Get $50 benefit from listening to public radio; could donate $100; if no one donates, public radio is shut down. Here is a table describing the outcomes of 2 people who can choose to donate or not. What is likely to happen if both follow their best interest? What will A choose if B chooses to donate? What will A choose if B chooses not to donate? Listener B Donate Listener A Don't Donate (-50,-50) (-50,50) Don't (50,-50) (0,0) 6 Public goods as externali1es In view of the free-rider problem, we can see that a public good is actually a special case of an externality. Contribu1ons to the provision of the public good create posi1ve external b...
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- Spring '11