Question

Answer the following questions with an essay of not more than 300 words each:

1.

a.

Explain the differences between a public good and a private good.

b.

Explain the free rider problem. Write a short paragraph on a real life example of the free rider problem that you personally experienced.

2.

a.

Explain how you could solve the following game by elimination of dominated strategy and underlining the best responses.

The Prisoner’s Dilemma:

Player 2

Defect

Cooperate

Player 1

Defect

10, 10

30, 5

Cooperate

5, 30

20, 20

b.

Explain why oligopoly firms have incentive to form a cartel and yet the cartel tends to break down with the above game.

Answer 1

1. a) The difference between public good and private good.

• A pure public good is a good or service that can be consumed simultaneously by everyone and from which no one can be excluded. A pure public good is one for which consumption is non-revival and from which it is impossible to exclude a consumer. Pure public goods pose a free-rider problem. A pure private good is one for which consumption is rival and from which consumers can be excluded.
• Public goods are those which are free to use and therefore there is no cost involved in usage of such products whereas for private ggods one has to pay in order to use them.
• Examples of public goods are air, roads, street lights and so on whereas examples of private goods are cars, cloths, furniture and so on.
• While usage of public goods does not reduce its availability for other people so it is not like if one person is breathing fresh air the other individuals won’t get fresh air. This is not the case with private goods because its usage leads to reduction in quantity or quality for others, so if one person has bought particular cloth it is not necessary that others will also be able to get same color, quality and texture of that cloth.
• Public goods are same for everybody so individual who is rich will also breathe same air which a poor person is breathing whereas in case of private goods if one is rich one can buy better quality so if there are two televisions one is 3d which is expensive and other is normal which is cheap than a person who is rich will go for 3d television while person who is not that rich will buy normal television.
• Public goods are either provided by nature or government whereas private goods are provided or manufactured by entrepreneurs who make them in order to earn profit.

b) Free Rider Problem

The free rider problem is the burden on a shared resource that is created by its use or overuse by people who aren't paying their fair share for it or aren't paying anything at all. The free rider problem can occur in any community, large or small. In an urban area, a city council may debate whether and how to force suburban commuters to contribute to the upkeep of its roads and sidewalks or the protection of its police and fire services. A public radio or broadcast station devotes airtime to fundraising in hopes of coaxing donations from listeners who aren't contributing.

Real life example is Wikipedia. Wikipedia, a free encyclopedia, faces a free rider problem. Hundreds of millions of people use Wikipedia every month but only a tiny fraction of users pay to use it. A large majority of Wikipedia users do not pay to use the site but are able to benefit from the information provided by the website.