Because of the free-rider problem, which of the following is most likely to occur when a good is non-excludable and non-rivalrous?

• A. The good will be efficiently allocated by private firms.
• B. Government intervention will be unnecessary.
• C. The good will be underprovided by the market.
• D. Consumers will pay more than the social optimum for the good.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the characteristics of the good described: it is non-excludable (people cannot be prevented from using it) and non-rivalrous (one person's use does not reduce availability to others). These are typical features of a public good.
2. Step 2: Recognize the free-rider problem: because individuals can benefit without paying, private firms have little incentive to provide the good at an efficient level since they cannot easily charge consumers.
3. Step 3: Analyze the market outcome: due to the free-rider problem, the private market tends to underprovide such goods because the marginal private benefit is less than the marginal social benefit.
4. Step 4: Understand why government intervention might be necessary: to correct the underprovision, governments often step in to provide or subsidize the good to reach the socially optimal level of provision.
5. Step 5: Conclude that the good will be underprovided by the market, which aligns with the correct answer, and that private firms will not efficiently allocate the good without intervention.