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Free Rider Problem
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Free rider problem In the class, what we were doing is finding out the society’s willingness to pay and who pays at a given quantity. If you remember the graph I draw on the board, we had three WTP curves for Daniel, Leslie, and Maggie. In the section ①, all three has WTP and make the society’s WTP as A. In the section ②, Maggie and Leslie have WTP and make the society’s WTP as B. In the section ③, only Maggie is willing to pay. Now, let’s identify free riders. In the section ①: if Maggie already paid for the good and Daniel and Leslie know that Maggie paid for it, Daniel and Leslie have incentive not to pay for the good because they know they are going to benefit from the good anyways. If they decide to not pay for the good, they become free riders. Because they decide not to pay for the good and only Maggie paid for the good, the quantity provided given a cost will be lower. This is why free rider problem creates under provision of the good. At P1, if we don’t have free riders, we are going to have Q2. If we have free riders, we are going to have Q1, which is less than Q2. Maggie Leslie Daniel Q P ① ② ③ A B C P1 Q1 Q2
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Transcript of Free Rider Problem
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Free rider problem
In the class, what we were doing is finding out the societys willingness to pay and who pays at a given quantity. If you remember the graph I draw on the board, we had three WTP curves for Daniel, Leslie, and Maggie. In the section , all three has WTP and make the societys WTP as A. In the section , Maggie and Leslie have WTP and make the societys WTP as B. In the section , only Maggie is willing to pay.
Now, lets identify free riders. In the section : if Maggie already paid for the good and Daniel and Leslie know that Maggie paid for it, Daniel and Leslie have incentive not to pay for the good because they know they are going to benefit from the good anyways. If they decide to not pay for the good, they become free riders. Because they decide not to pay for the good and only Maggie paid for the good, the quantity provided given a cost will be lower. This is why free rider problem creates under provision of the good. At P1, if we dont have free riders, we are going to have Q2. If we have free riders, we are going to have Q1, which is less than Q2.
Maggie Leslie Daniel
Q
P
A
B
C
P1
Q1 Q2
