A Level Economics AQA Practice Exam

What is one major consequence of the free rider problem?

1. Increased consumption of public goods

2. Under-provision of public goods

3. Rise in product quality

4. Effective pricing in competitive markets

The correct answer is: Under-provision of public goods

The free rider problem occurs when individuals benefit from resources, goods, or services without paying for them, which leads to a situation where the market is unable to provide these goods efficiently. This is particularly relevant for public goods, which are non-excludable and non-rivalrous, meaning that one person's use of the good does not reduce its availability to others, and individuals cannot be effectively excluded from their use. When people know they can receive the benefits of a public good without paying, they have less incentive to contribute to its provision. As a result, the total quantity of these goods supplied tends to be lower than what would be socially optimal, causing under-provision. This under-provision can lead to societal welfare losses because public goods, like national defense and public parks, are crucial for the well-being of the community. In contrast, the other options do not accurately reflect the implications of the free rider problem. Increased consumption of public goods would imply successful provision, which is unlikely due to the free rider issue. A rise in product quality or effective pricing in competitive markets also do not result from the free rider problem; instead, they relate to different market dynamics entirely.