2.9 Market failure - public goods

The scenario describes a person who does not pay but still fully enjoys the benefit of a government-provided good. This is the textbook definition of free-riding, which arises specifically from the characteristic of non-excludability.

Non-excludability means it is technically impossible, or prohibitively costly, to prevent someone who has not paid from consuming the good once it is provided. The tax evader in the scenario cannot be shut out of the good's benefits, which is exactly what non-excludability describes.

A good that is non-excludable (and also non-rival) is a pure public good. The free-rider problem is the direct consequence of non-excludability: since non-payers cannot be excluded, individuals have no financial incentive to voluntarily contribute.

The correct answer identifies the good as a pure public good and correctly names non-excludability as the characteristic enabling free-riding, directly linking the two concepts in the way examiners reward.

We need to identify which type of good allows a non-payer to keep consuming it, and which specific characteristic makes this possible. The answer requires both the correct good type and the correct characteristic.

Merit goods experience market failure because they are under-consumed, not because non-payers cannot be excluded. A merit good (like education or healthcare) can be withheld from non-payers — this is precisely what distinguishes it from a public good. The positive externality explanation does not capture why the tax evader cannot be excluded.

Non-rivalry is about whether one person's consumption reduces availability for others — it is not the characteristic that enables free-riding. A club good is excludable, meaning non-payers can be stopped from consuming it. If the tax evader cannot be excluded, the good cannot be a club good.

A common pool resource is rival (consumption by one reduces availability for others) and non-excludable. However, the defining mechanism enabling the tax evader to free-ride is non-excludability, not rivalry. Rivalry would mean the evader's consumption deprives others — that is a different issue from free-riding on a public good.

Only the first option correctly labels the good as a pure public good and correctly attributes free-riding to non-excludability — the inability to prevent the tax evader from consuming the benefit, regardless of payment.

Before encryption, the satellite signal could be received by anyone with a dish — it was non-excludable (no one could be stopped from receiving it). One household watching did not reduce signal quality for others — it was non-rival. Together, these made it a pure public good.

Encryption introduces a decoder-card requirement. Households without a valid, paid card cannot decrypt the signal. This means non-payers can now be technically prevented from consuming the good — excludability has been introduced. Encryption engineering has changed this characteristic.

Encryption does not change whether one household's viewing reduces signal availability for another. Whether 100 or 100,000 subscribers watch simultaneously, the broadcast signal is not depleted. Non-rivalry is unchanged — the marginal cost of an additional subscriber watching is still zero (below network capacity limits).

After encryption: the signal is excludable (non-payers are blocked) but non-rival (watching does not deplete the signal). This combination defines a club good, not a pure public good, a private good, or a common pool resource.

The correct option states that encryption introduces excludability, converting the good from a pure public good into a club good, while non-rivalry is preserved — which accurately describes how engineering excludability shifts a good's classification without changing its rivalry characteristics.

The question asks how encryption changes the good's economic classification. We need to track what encryption does and does not change, then match the result to the correct good-type category.

Encryption has no effect on rivalry. Whether or not a signal is encrypted, one household viewing it does not diminish the signal for others. Rivals are goods where consumption depletes available supply — a satellite broadcast is not depleted by viewership, so this option is incorrect on both the mechanism and the resulting classification.

This option reverses the direction of change. Before encryption, the signal was already non-rival. Encryption adds excludability — it does not add non-rivalry. Furthermore, a pure public good is non-excludable, so adding a decoder requirement moves the good away from a pure public good, not toward one.

Encryption only affects excludability, not rivalry. A private good requires both excludability and rivalry. Since the encrypted broadcast remains non-rival (one viewer does not reduce availability for others), converting it to a private good would require also changing rivalry — which encryption does not do.

Encryption introduces excludability while leaving non-rivalry intact. This combination — excludable but non-rival — is precisely the definition of a club good. The correct option accurately describes this transformation.