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CA Foundation · Business Economics · Public Finance

A public park in a town has no entry fee and no gate. Rajesh uses it daily, and his use does not reduce anyone else's enjoyment. Why will a profit-seeking private firm generally under-supply or fail to supply such a good?

A private firm generally fails to supply such a good because it cannot exclude non-payers, so people free ride and the firm cannot recover its costs through charges. The market therefore under-provides the good, which is why governments typically finance public goods through taxation.

  1. ABecause the firm cannot charge users who can benefit without paying, so revenue does not cover costCorrect
  2. BBecause the good is rival in consumption, so each user imposes a cost
  3. CBecause consumers place no value on the good
  4. DBecause the marginal cost of serving each extra user is very high

Explanation

Since non-payers cannot be excluded, consumers have an incentive to free ride, and the firm cannot collect revenue to cover costs. Option on rivalry is wrong because the park is non-rival. Marginal cost of an extra user is near zero, not high, so that option is also wrong.

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