Why do vendors often choose to locate near their major customers in markets affected by the free rider problem or the tragedy of the commons?

• A. To avoid government regulation and taxes
• B. To increase competition among vendors and drive prices down
• C. To reduce transaction costs and ensure reliable access to shared resources
• D. To prevent the overuse of private goods

Answer: (C)

Verified step by step guidance

1. Understand the free rider problem and the tragedy of the commons: both involve shared resources where individuals may benefit without paying or may overuse the resource, leading to inefficiency.
2. Recognize that vendors locating near major customers helps reduce transaction costs, which include the time, effort, and expenses involved in making exchanges or accessing resources.
3. Consider that by being close to customers, vendors can ensure more reliable and timely access to shared resources, reducing uncertainty and potential losses from free riding or overuse.
4. Note that this proximity does not primarily aim to avoid government regulation or taxes, nor is it intended to increase competition to drive prices down.
5. Conclude that the main economic incentive for vendors to cluster near customers in such markets is to minimize transaction costs and secure dependable access to shared resources, mitigating problems caused by free riding or overuse.