A . What is a free rider and when do we see free riding? b. Why doesn't the market calculate the costs and benefits that accrue to free riders?
a . A free rider is someone who gets the benefits from the provision of a good without paying for it. We
see free riding occur with public goods and with goods that have positive externalities associated with
them.
b. The market only considers the costs to and benefits for market participants, that is, the buyers and
sellers. Free riders are strictly third party beneficiaries, and so their benefits are not considered by
market participants.
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Indicate whether the statement is true or false
A firm in pure competition would shut down when:
a. price is less than average total cost b. price is less than average fixed cost c. price is less than marginal cost d. price is less than average variable cost