Multiple Choice
In the case of a shared pasture, what is the rational strategy of herdsmen acting in their own best interests?
8. The Types of Goods
The Free Rider Problem and the Tragedy of the Commons
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Making customers pay per use of a public good is inefficient because:
A
It results in deadweight loss
B
MC of the use of the public good once provided is zero
C
It uses willingness to pay as a measure of preferences
D
Both (a) and (b)
Verified step by step guidance1
Understand the nature of public goods: Public goods are non-excludable and non-rivalrous, meaning that one person's use of the good does not reduce its availability to others, and people cannot be effectively excluded from using it.
Identify the concept of deadweight loss: Deadweight loss occurs when the allocation of resources is not efficient, often due to market distortions such as taxes or pricing mechanisms that do not reflect the true cost of production.
Analyze the marginal cost (MC) of using a public good: Once a public good is provided, the marginal cost of an additional person using it is typically zero, because their use does not diminish the availability of the good to others.
Evaluate the inefficiency of charging per use: Charging users for each use of a public good can lead to underconsumption, as the price may deter people from using the good even though the marginal cost is zero, resulting in deadweight loss.
Consider the role of willingness to pay: While willingness to pay can indicate preferences, using it as a pricing mechanism for public goods can be inefficient because it does not account for the zero marginal cost of providing the good to additional users.
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The Free Rider Problem and the Tragedy of the Commons practice set
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