Why does the market system fail to produce public goods efficiently?

• A. The government prohibits the production of public goods by private firms.
• B. Individuals can benefit from public goods without paying for them, leading to the free-rider problem.
• C. Public goods are always excludable and rival in consumption.
• D. Public goods generate negative externalities that discourage production.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definition of public goods. Public goods are characterized by being non-excludable (people cannot be prevented from using them) and non-rivalrous (one person's use does not reduce availability to others).
2. Step 2: Recognize the free-rider problem. Because individuals cannot be excluded from benefiting from public goods, some may choose not to pay for them, expecting others to cover the cost while they still enjoy the benefits.
3. Step 3: Analyze why private firms may fail to produce public goods efficiently. Since firms rely on payment to cover costs, the free-rider problem reduces incentives for private firms to produce these goods, as they cannot easily charge all beneficiaries.
4. Step 4: Contrast public goods with private goods. Private goods are excludable and rivalrous, allowing firms to charge consumers directly, which is not the case for public goods.
5. Step 5: Conclude that due to the free-rider problem and the non-excludable nature of public goods, the market system alone often fails to provide these goods efficiently, which is why government intervention is typically necessary.