Perfectly competitive markets will tend to under-allocate resources to nonexclusive public goods because

Question

Quizplus · Accepted Answer

Nonexclusive public goods are characterized by nonrivalry and nonexcludability, meaning that consumption by one individual does not diminish the ability of others to consume the good and it is impossible to exclude anyone from consuming the good. As such, consumers in a perfectly competitive market will not be willing to pay a price that reflects the full social benefits of the good, because they can consume the good without paying. Consequently, firms will not produce the socially optimal quantity, leading to an under-allocation of resources to these goods. This is the case even though they can be produced under conditions of increasing returns to scale, so option A is incorrect. Option C is also incorrect, as public goods are not best produced under conditions of monopoly. Finally, option D does not apply, as the issue here is not the availability of capital but the non-rivalry and non-excludability of the good.

Perfectly Competitive Markets Will Tend to Under-Allocate Resources to Nonexclusive