There are 3,000 families in a small town that are affected by air pollution from a local factory. The air pollution could be reduced if the company spent $10,000 on upgraded ventilators. The company agrees to install the ventilators if the affected families contribute the $10,000. However, because individuals will benefit from the reduction in air pollution whether they contribute or not, most people will not contribute and the firm will not install the ventilators. This outcome is an example of the
A) free-rider problem.
B) drop-in-the-bucket problem.
C) Coase theorem.
D) collective action problem (that arises when there are too many parties involved).

Question

Quizplus · Accepted Answer

The free-rider problem occurs when individuals benefit from resources, goods, or services without paying for them, which leads to under-provision of those goods or services. In this scenario, individuals benefit from the air pollution reduction without contributing to the cost of the ventilators, exemplifying the free-rider problem.

There Are 3,000 Families in a Small Town That Are