Question 1
What is the free-rider problem and how does government action help to overcome it?Question 2
Explain why a positive externality is likely to be associated with the purchase of smoke detectors.Answer 1
Some goods are consumed collectively, such as law and order, clean air and water, and public open space. It is very difficult to stop someone consuming them who has not paid their share of the costs. The non-payer is called a free-rider. Paying for these goods by taxation solves this problem.Answer 2
Smoke detectors help to reduce loss of life and property from fire. This benefits society in general by reducing insurance premiums for everyone, and people living longer to make their contribution to society.