Which of the following best describes the free rider problem?

• A. It occurs when firms collude to set prices above competitive levels.
• B. It occurs when the government sets a price ceiling below the equilibrium price, causing shortages.
• C. It occurs when individuals benefit from a good or service without paying for it, leading to under-provision of that good.
• D. It occurs when common resources are overused because individuals act in their own self-interest.

Answer: (C)

Verified step by step guidance

1. Understand the concept of the free rider problem: It arises in situations involving public goods or services that 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.
2. Recognize that because individuals can benefit without paying, they have an incentive to 'free ride' on the contributions of others, leading to fewer people willing to pay for the good or service.
3. Identify the consequence of the free rider problem: the good or service tends to be under-provided or underfunded since private markets may fail to supply it at an efficient level.
4. Compare the free rider problem to other economic issues: for example, collusion relates to firms setting prices, price ceilings relate to government intervention causing shortages, and overuse of common resources relates to the tragedy of the commons, which is a different problem.
5. Conclude that the best description of the free rider problem is when individuals benefit from a good or service without paying for it, leading to under-provision of that good.