A Level Economics AQA Practice Exam

What does the free rider problem refer to?

1. When a good is consumed without payment

2. The inability to price a good effectively

3. The excess supply of a good in the market

4. The government provision of public goods

The correct answer is: When a good is consumed without payment

The free rider problem specifically describes a situation where individuals benefit from a resource or service without paying for it. This is typically associated with public goods, which are non-excludable and non-rivalrous, meaning that once they are provided, individuals cannot be effectively excluded from using them, and one person's use does not reduce availability for others. For example, consider a public park. Everyone can use it without paying a fee, leading some individuals to choose not to contribute toward its upkeep, as they can still enjoy the benefits without incurring any cost. This creates a dilemma where the good may be underfunded and underprovided, as fewer individuals are incentivized to contribute when they can free ride on the efforts of others. The other answers do not capture the essence of the free rider problem as precisely. While pricing issues and excess supply may relate to other economic phenomena, they do not specifically address the unique challenges posed by non-excludable consumption. Government provision of public goods is a potential solution to the free rider problem, but does not define it.