"Why is the private market unlikely to provide the optimal level of public goods due to...

"Why is the private market unlikely to provide the optimal level of public goods due to the free rider problem?"

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Expert Solution

The private market is unlikely to provide the optimal level of public goods due to the free ried problem. This is because of the prisoner's dilemma problem. Consider a private market with just two participants A and B and an economy with just two citizens A and B. Consider the optimal level of public goods to be $20 and this can be achieved if both A and B contribute $10 each.

CASE 1: Both A and B contribute $10 each and enjoy the social benefit of $20 each.There would be optimal level of public goods. Net benefit for A= Net benefit for B= $20-$10 = $10.

CASE 2: A contributes $10 and B does not. There would be suboptimal level of public goods in the economy and both A and B enjoy the social benefit of $10 each. Net benefit for A= $10-$10= $0 and net benefit for B= $10-$0 = $10.

CASE 3: B contributes $10 and A does not. There would be suboptimal level of public goods in the economy and both A and B enjoy the social benefit of $10 each. Net benefit for B= $10-$10= $0 and net benefit for A= $10-$0 = $10.

CASE 4: Both A and B do not contribute and then there would be no public goods. Net benefit for A= Net benefit for B =$0 and both A and B would enjoy no social benefits.

Now, when each participant thinks through their startegies, they would end up not contributing at all due to the free rider problem and therefore,the private market is unlikely to provide the optimal level of public goods due to the free ried problem.

jeff jeffy answered 1 year ago

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