Question

5. The government regulates the use of the water by making producers who use the water as inputs buy “use permits”. Michael J., the owner of Michael’s Secret Stuff Sports Drink knows that a local recreation company the MonStars Rec don’t have a permit but still use the water. a. Help Michael make a case against the MonStars Rec by explaining how they might be Free Riders b. What could be done to make the water more excludable?

Answer 1

The free rider problem is a market failure that occurs when people take advantage of a publicly available good, without paying for it, as is the case when citizens of a country utilize public goods without paying their fair share in taxes. The free rider problem only arises in a market in which supply is not diminished by the number of people consuming it and consumption cannot be restricted. In this case water is obtained through free riding.

b. One solution is to treat the many beneficiaries as one consumer and then divide the cost equally. ​Let all the producers who use water pay equally irrespective of their usage.