2. The market system does not produce public goods because:
A. there is no need or demand for such goods.
B. private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
C. public enterprises can produce such goods at lower cost than can private enterprises.
D. their production seriously distorts the distribution of income.

Question

2.    The market system does not produce public goods because:
A.    there is no need or demand for such goods.
B.    private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
C.    public enterprises can produce such goods at lower cost than can private enterprises.
D.    their production seriously distorts the distribution of income.

BlackTom AI · Accepted Answer

The question asks why the market system does not produce public goods, and provides four statements to evaluate. 
Option A: 'there is no need or demand for such goods.' In reality, public goods often have substantial total social demand, but the market fails to provide them efficiently due to characteristics like non-excludability and non-rivalry. The issue is not a lack of demand, but the inability of markets to charge all beneficiaries and prevent free riding, which leads to underprovision.
Option B: 'private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.' This captures the free-rider problem: because public goods are non-excludable, people can enjoy the good without paying, so private firms lack sufficient incentive to supply them. This is a core reason markets underprovide public goods and why government intervention is common.
Option C: 'public enterprises can produce such goods at lower cost than can private enterprises.' This is not a general truth and, when it happens, could support public provision, but it is not the standard reason the market fails to supply public goods. The typical argument focuses on non-excludability and non-rivalry, not cost advantages of public enterprises.
Option D: 'their production seriously distorts the distribution of income.' While some public goods financing can have distributional effects, this is not the principal economic reason markets underproduce public goods. The efficiency problem arises from the free-rider issue and the non-excludability feature, rather than a direct distortion of income distribution.

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