Question

1. Why would private firms underprovided public goods? Explain in detail and illustrate with an example.

Answer 1

Private firms usually under provides public goods because of the free rider problem.

Public goods : Public refers to a commodity or service that is made available to all members of a society. They are non exculdable and non rivalorous.

Non-excludable: Non-paying consumers cannot be prevented from accessing a good.

Non-rivalrous: A good whose consumption by one consumer does not prevent simultaneous consumption by other consumers.

Since private firms know that a public good is non excludable and non rivalrous, they expect that someone else would provide it. Every firm ends up thinking this way and therefore the public good ends up being underprovided.

Example

Consider a scenario of a file sharing service (like Torrents). Anyone can upload and anyone can use it. However, most users of file sharing services never contribute uploaded files; they only download files. They know that their downloading ability is not affected by how much they upload. Therefore, most of the people end up not uploading that eventually lead to underprovision of uploads.