Chapter 16: Problem 3

For each of the following goods, explain why a free-rider problem arises or how it is avoided. July 4 th fireworks display Interstate 81 in Virginia Wireless Internet access in hotels The public library in your city

Short Answer

Expert verified

Fireworks: free-rider issue due to non-excludability. Interstate 81: mitigated by taxes. Hotel Wi-Fi: no issue due to excludability. Public library: funded by taxes, some rivalry.

Step by step solution

- Analyzing July 4th Fireworks Display

A free-rider problem arises with a July 4th fireworks display because it is non-excludable and non-rivalrous. This means that people can enjoy the fireworks without paying for them, leading to underprovision by private markets since individuals have no incentive to pay.

- Explaining Interstate 81 in Virginia

Interstate 81 can be considered mostly non-excludable and non-rivalrous for the general public. However, the free-rider problem is mitigated through government funding via taxes, ensuring maintenance and availability.

- Discussing Wireless Internet Access in Hotels

Wireless Internet access in hotels is generally excludable and rivalrous, as hotels can require a password and limit usage. Therefore, a free-rider problem is avoided by restricting access to paying customers.

- Examining The Public Library in Your City

Public libraries are non-excludable but may experience some rivalry if they become crowded. The free-rider problem is mainly handled through municipal funding, allowing continued public access without direct charges per use.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

non-excludable goods

Non-excludable goods are goods that cannot easily prevent people from using them, even if they did not pay for them. This is seen with July 4th fireworks displays. These displays can be viewed by anyone who is nearby, regardless of whether they contributed to funding the event.
This creates a free-rider problem because people can benefit without paying. Hence, there is often little incentive for individuals to pay for or organize such events themselves.
Governments or private organizations often provide these goods to overcome the issues associated with free-riders.

non-rivalrous goods

Non-rivalrous goods are goods where one person's consumption does not diminish another's consumption of the same good. This is often seen in public goods like fireworks displays or the use of interstate highways.
For instance, when someone watches a fireworks display, it does not prevent others from enjoying it too. Similarly, driving on a highway does not typically prevent others from using it unless it becomes heavily congested.
Non-rivalrous characteristics help justify public funding of such goods as they can be consumed collectively without direct competition.

public funding

Public funding refers to the way certain goods and services are financed using government resources, often through taxation. This funding helps to provide non-excludable and non-rivalrous goods to the general public.
Examples include Interstate highways in Virginia and public libraries. Taxes collected from the public are used to maintain and fund these services. This method helps avoid the free-rider problem by ensuring adequate provision and maintenance.
Without public funding, such goods might be underprovided as individuals may not adequately fund them independently.

economic externalities

Economic externalities are costs or benefits of a good or service that affect bystanders who are not directly involved in the economic transaction. They can be either positive or negative.
For instance, a public library provides positive externalities such as increasing literacy and community engagement. These benefits extend beyond those who directly use the library.
On the other hand, wireless internet in hotels is largely controlled to avoid negative externalities such as network congestion, by ensuring only paying customers have access.
Externalities play a significant role in justifying the provision or regulation of certain goods and services.