Question

Explain why non-excludability presents a problem for free markets.

Answer 1

Non-excludability: The profits gained from mere public goods can not be limited only to those who paid for them. Yes, non-payers can receive consumer benefits at no financial cost–economists call this the "free-rider" problem. Therefore, demand depends on the ability to pay for private goods

The absence of excludability and rivalry leads to market failures that ensure that markets can not provide certain goods and services efficiently. Public goods exhibit non-exclusiveand non-rivalous characteristics, such as streetlights or national defense. Such goods lead to a free-rider problem in a private market economy where consumers enjoy the benefits of the good or service without paying for it. Therefore, these products are unprofitable and unsustainable for processing in a private market, and the government must provide them.

Since public goods are not exempted, it is difficult to charge people for the benefit of a good or a service once it is delivered The free rider issue contributes to the under-supply of a good and therefore to market failure.

The government's direct procurement of a public good can help overcome the free-rider dilemma that leads to market failure The non-rival nature of demand provides the government with a strong case for supplying and charging for public goods rather than the market.
At the point of use, many public goods are supplied more or less freely and then paid out of general taxation or other general form of charge such as a license fee.
State provision can help prevent the under-supply and under-consumption of public goods in order to improve social welfare.