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CA Foundation · Business Economics · Public Finance

Which of the following is the main reason governments typically finance pure public goods through general taxation rather than leaving them to the market?

Governments finance pure public goods through taxation because of the free-rider problem: since people cannot be excluded, they have no incentive to pay voluntarily, and markets would under-provide the good. Compulsory tax contributions ensure adequate funding for goods such as defence.

  1. AFree-rider behaviour prevents the market from collecting enough payment to cover provision costsCorrect
  2. BPublic goods are always produced at a loss by government departments
  3. CPrivate firms are legally barred from producing goods
  4. DConsumers prefer to pay higher prices for public goods

Explanation

Because pure public goods are non-excludable, individuals can enjoy them without paying, so private provision would be inadequate. Taxation compels contribution and funds provision. The other options state things that are untrue or irrelevant to the economic rationale.

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