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A-Level · Economics

ECO.MIC20 Public Goods and the Free-Rider Problem

AQA 7136 · Calculators not allowed · about 45 minutes

Total Marks

Name: _______________________________ Date: ____ / ____ / ______

Answer all questions. Full sentences are required for questions worth 3 marks or more and for the 12-mark question. Time guidance: 45 minutes for the whole pack.

Define the economic term 'non-excludability' in the context of public goods, using the example of national defence in the United Kingdom.

(Total for Question 1 is 2 marks)

Define the economic term 'non-rivalry' in the context of a public good, with reference to street lighting in a UK town.

(Total for Question 2 is 2 marks)

State whether each of the following is typically a private good, a pure public good, or a quasi-public good: (i) a paid private gym membership, (ii) national defence, (iii) a toll road where only users who pay can drive on it.

(Total for Question 3 is 3 marks)

Explain, with one short example, why a private firm may under-provide street lighting if left to the market, referring to the free-rider problem.

(Total for Question 4 is 3 marks)

Explain how a toll road is an example of a quasi-public good, and identify one way congestion can change its characteristic.

(Total for Question 5 is 3 marks)

Define the free-rider problem in the context of public goods, using the example of a national vaccination programme where herd immunity benefits all residents.

(Total for Question 6 is 2 marks)

State two reasons why private markets are unlikely to supply national defence in the required quantity for a country like the UK.

(Total for Question 7 is 2 marks)

Explain, with an example, how government provision financed by taxation can solve the under-provision of a public good such as lighthouses for shipping safety.

(Total for Question 8 is 3 marks)

State whether the following statements are true or false and give a one sentence justification for each in the context of public goods: (a) 'All excludable goods are private goods', (b) 'A good can be non-excludable but rival'.

(Total for Question 9 is 3 marks)

Explain briefly why quasi-public goods may be provided by private firms whereas pure public goods usually are not, using the example of a concert in a fenced venue compared with national weather radar services.

(Total for Question 10 is 2 marks)

State two possible limitations or problems with government provision of public goods financed by taxation, briefly explaining each in the context of provision of free-to-access public parks.

(Total for Question 11 is 3 marks)

Explain, in two brief points, how the marginal cost and marginal benefit concepts help justify state provision of a public good such as national defence.

(Total for Question 12 is 2 marks)

Analyse why the free market is likely to fail to provide the public good of national defence for a country the size of the United Kingdom. In your answer, explain the roles of non-excludability, non-rivalry and the free-rider problem, and consider whether any private or quasi-market mechanisms could partially address the under-provision. Use UK-style examples where helpful.

Analyse why the free market is likely to fail to provide national defence for a country the size of the United Kingdom. In your answer explain non-excludability, non-rivalry and the free-rider problem, and evaluate any private or quasi-market mechanisms that might partially address under-provision.

(Total for Question 13 is 12 marks)

Mark scheme · ECO.MIC20 Public Goods and the Free-Rider Problem

Question 1

B1 a statement that non-excludability means it is difficult or impossible to prevent people who do not pay from enjoying the good
B1 example link: once national defence is provided, all residents benefit whether they contributed or not
Answer: Non-excludability means people cannot be prevented from benefiting from a good if it is provided; for national defence everyone in the country gains protection whether or not they paid for it.

Question 2

B1 a statement that non-rivalry means one person's use of the good does not reduce its availability to others
B1 example link: one person benefiting from street lighting does not prevent others from also benefiting
Answer: Non-rivalry means one person's consumption does not reduce what is available for others; for street lighting, one pedestrian using the light does not stop another pedestrian from also benefiting.

Question 3

B1 (i) private gym membership = private good
B1 (ii) national defence = pure public good
B1 (iii) toll road = quasi-public good (excludable but non-rival up to congestion)
Answer: (i) private good; (ii) pure public good; (iii) quasi-public good (excludable, may be non-rival until congested).

Question 4

M1 identifies the free-rider problem: individuals can benefit without paying
M1 explains consequence: firms cannot easily charge every beneficiary, reducing incentives to provide the good
A1 gives a concrete example: a private firm cannot prevent nearby residents from using public street lights, so it cannot recoup costs through charging and will under-provide or not supply them
Answer: Because street lighting is non-excludable, people can free-ride by using the light without paying; private firms cannot charge all beneficiaries so they cannot recoup costs, for example a firm lighting a street could not stop neighbours benefiting and therefore would under-provide or not install lighting.

Question 5

M1 explains that a toll road is excludable because users who do not pay can be prevented from using it
M1 explains that a toll road can be non-rival when traffic is light because one user's driving does not reduce another's ability to drive
A1 states that when congestion is high the road becomes rival, reducing the benefit per additional user
Answer: A toll road is excludable since non-payers can be kept off, and it may be non-rival when traffic is light; however, with heavy congestion it becomes rival because extra vehicles reduce other drivers' speed and utility.

Question 6

B1 a statement that the free-rider problem is where individuals benefit from a good without paying for it
B1 example link: people who refuse vaccination still receive protection from herd immunity provided by others
Answer: The free-rider problem is when people benefit from a good without contributing to its cost; for example, someone who does not get vaccinated still gains some protection from others through herd immunity.

Question 7

B1 non-excludability means providers cannot prevent non-payers from benefiting, so they cannot ensure payment
B1 non-rivalry means marginal cost of adding another beneficiary is zero, making it hard to charge per user and recoup fixed costs
Answer: Non-excludability prevents excluding non-payers so payment cannot be enforced; non-rivalry means marginal cost per additional beneficiary is near zero, so charging per user is impractical and firms cannot cover fixed costs.

Question 8

M1 identifies that government can fund provision using general taxation to cover fixed costs
M1 explains that taxation overcomes the free-rider problem by forcing payment from taxpayers who all benefit
A1 gives example: a government funds coastal lighthouses from tax revenue so ships benefit even if individual owners would not pay voluntarily
Answer: The government can fund lighthouses using general taxation, covering fixed costs and solving the free-rider problem since taxpayers pay and all ships gain the safety benefit even if individual shipowners would not voluntarily pay.

Question 9

B1 (a) false, justification: excludability alone does not determine rivalry, so a good can be excludable yet non-rival (quasi-public) or excludable and rival (private)
B1 (b) true, justification: example such as a public park that is non-excludable but can be rival when crowded
B1 each justification links the truth value to the definitions of excludability and rivalry
Answer: (a) False: excludability alone does not make a good private. (b) True: some goods can be non-excludable but rival, for example a park that becomes crowded.

Question 10

M1 quasi-public goods are excludable, so firms can charge users directly (e.g. fence and ticket a concert), allowing cost recovery
M1 pure public goods are non-excludable so private firms cannot prevent non-payers from benefiting and thus cannot recoup costs (e.g. national weather radar provides information to all)
Answer: Quasi-public goods can be made excludable so firms can charge users and recover costs, as with a ticketed concert, while pure public goods like national weather radar are non-excludable so private firms cannot prevent non-payers from benefiting and cannot recoup costs.

Question 11

B1 identifies a limitation, e.g. government may provide at inefficient scale due to political pressures rather than cost-benefit
B1 explains it in context: a council might over-invest in park amenities to win votes rather than reflect actual public demand
B1 identifies and explains a second limitation, e.g. taxation creates deadweight loss or distortion, reducing economic efficiency and possibly crowding out private provision
Answer: Governments may provide at an inefficient scale due to political motives, for example over-investing in park features for popularity, and taxation to finance parks can create economic distortions or deadweight loss, reducing overall efficiency and potentially crowding out private alternatives.

Question 12

M1 point that marginal cost of providing the public good to an additional user is near zero for non-rival goods, so private pricing at marginal cost would not cover fixed costs
M1 point that the marginal social benefit exceeds the marginal private benefit because everyone benefits, justifying collective provision financed by taxation
Answer: Marginal cost of serving an additional beneficiary is near zero for non-rival goods so private marginal-cost pricing would not recoup fixed costs, and marginal social benefit exceeds marginal private benefit because the whole population gains, so collective provision funded by taxation can achieve the socially optimal provision.

Question 13

Level 1 (1-4): Basic analysis: identifies one or two relevant features of public goods such as non-excludability or the free-rider problem with limited explanation and little contextual development. Little or no evaluation of private/quasi-market responses.
Level 2 (5-8): Clear analysis: explains how non-excludability and non-rivalry lead to the free-rider problem and under-provision by private markets, with some application to the context of national defence. May suggest plausible private or quasi-market responses and discuss their limitations.
Level 3 (9-12): Thorough analysis and evaluation: well developed explanation of why private markets fail for national defence, including clear use of non-excludability, non-rivalry and free-rider logic, assessment of magnitude and practicalities, and evaluation of private/quasi-market mechanisms with reasoned judgement supported by UK-style examples.
Indicative content:
- Non-excludability: national defence cannot exclude non-payers, so private firms cannot ensure only paying individuals receive protection, creating weak incentives to pay and deterring private provision.
- Non-rivalry: one person gaining protection does not reduce the protection available to others, so marginal cost of serving an additional person is near zero and charging per user is impractical for cost recovery.
- Free-rider problem: individuals have incentive to withhold payment and rely on others, so voluntary contributions under-provide relative to social optimum.
- Public-goods market failure: private provision would either be too little or absent; provision requires covering large fixed costs of armed forces, equipment and intelligence which private voluntary payments will not finance.
- Quasi-market mechanisms: examples include subscription services for private security, alliances, insurance-based approaches, or targeted premiums for certain benefits; discussion of why these are limited for national defence because threats are collective, border-crossing and not excludable.
- Evaluation of taxation provision: collective financing via taxation overcomes free-rider problem but raises questions about optimal level, efficiency costs of taxation, political economy influences and potential over- or under-provision due to political motives.
- Practicalities and magnitude: scale of defence, deterrence value, public goods spillovers to trade and investment, and benefits that are hard to price; time horizon and irreversibility of defence investment.
- Judgement: balanced conclusion weighing the theoretical failure of markets against the limited role of private mechanisms and the pragmatic necessity of public provision via the state for national defence.

Public Goods and the Free-Rider Problem - Worksheets, Questions and Revision