Which of the following explains why free-riding can result in a market failure?

• A. Government intervention always leads to efficient allocation of resources.
• B. Firms are able to perfectly price discriminate, maximizing social welfare.
• C. Individuals consume a good without paying for it, leading to under-provision by the market.
• D. Private goods are excludable and rivalrous, preventing any market failure.

Answer: (C)

Verified step by step guidance

1. Understand the concept of free-riding: it occurs when individuals consume a good without paying for it, benefiting from the good without contributing to its cost.
2. Recognize that free-riding is typically associated with public goods, which are non-excludable and non-rivalrous, meaning people cannot be prevented from using them and one person's use does not reduce availability to others.
3. Analyze how free-riding leads to market failure: since individuals can benefit without paying, there is little incentive for private firms to produce the good, resulting in under-provision or no provision of the good by the market.
4. Contrast this with private goods, which are excludable and rivalrous, allowing firms to charge consumers and avoid free-riding, thus preventing market failure in those cases.
5. Conclude that the correct explanation for why free-riding causes market failure is that individuals consume a good without paying for it, leading to under-provision by the market.