A Level Economics AQA Practice Exam

What happens when a public good is provided by the free market?

1. It is likely to be over-priced

2. The market may fail to deliver it entirely

3. It results in efficient resource allocation

4. All consumers are satisfied with the outcome

The correct answer is: The market may fail to deliver it entirely

When a public good is provided by the free market, the most accurate outcome is that the market may fail to deliver it entirely. Public goods are characterized by their non-excludability and non-rivalry, meaning that once they are provided, individuals cannot be effectively excluded from using them, and one person's use does not reduce availability for others. Because of these characteristics, private companies have little incentive to produce public goods, as they cannot easily charge consumers for their use. This often leads to the phenomenon called the "free rider problem," where individuals benefit from the good without contributing to its cost, resulting in underproduction or no production at all in a purely free market environment. This outcome demonstrates a market failure, as the provision of these goods is essential for societal welfare but is not adequately met by market forces alone. Understanding this concept is crucial, especially when analyzing the limitations of markets in providing certain types of goods and services.