Future Business Leader Achievments (FBLA) Economics Practice Exam

What issue arises when not all beneficiaries of a public good contribute to its cost?

1. The free rider problem

2. The public goods rationale

3. Freedom of choice

4. None of these

The correct answer is: The free rider problem

The issue that arises when not all beneficiaries of a public good contribute to its cost is known as the free rider problem. A public good is defined by its characteristics of being non-excludable and non-rivalrous, meaning that once it is provided, no one can be effectively excluded from using it, and one person's use does not diminish the availability for others. Because individuals can benefit from the good without directly paying for it, some may choose to avoid contributing, relying instead on others to cover the costs. This leads to underfunding of the public good, as the revenue required to maintain or enhance it is not sufficiently gathered due to the lack of contributions from all users. As a result, the public good may become inefficiently provided or could eventually fail to exist, impacting all beneficiaries negatively. This creates a dilemma for society on how to fund and provide sufficient public goods since voluntary contributions may not meet the necessary costs for provision. The other options mention concepts that do not directly address the issue of non-contributing beneficiaries. Thus, the free rider problem captures the essence of the economic challenge related to public goods most accurately.