Public goods are typically underprovided in a free market because of the free-rider problem.

• A. True
• B. False
• C. It depends on the funding mechanism
• D. It depends on the price mechanism

Answer: (A)

Public goods have two features: they are non-excludable and non-rivalrous. In a free market, people can enjoy these goods without paying, so there’s little incentive to contribute to their cost. Since providers can’t easily charge everyone who benefits, they may not cover the costs, leading to provision that’s below the socially optimal level. This free-rider problem is why public goods are typically underprovided unless the government or another collective funding mechanism steps in. For example, everyone benefits from street lighting or national defense, but private markets won’t reliably supply them in the right amount without some form of compulsory funding. The limited effectiveness of the price mechanism for these goods reinforces why underprovision occurs in a free market.