People have a demand for cars, and a market economy provides sweaters. There is

Question

People have a demand for cars, and a market economy provides sweaters. There is evidence that people also have a demand for national defense, in that they are willing and able to spend some of their money on defense. But unlike cars, which are produced and sold by private companies, national defense is paid for by the government. Why is that? In your response, briefly explain the difference between private and public goods, and why the free rider problem undermines the provision of public goods.

Explanation / Answer

The defense of a nation is a type of a good completely different from other types where people do not pay for each unit they use, but perhaps it collectively for the entire nation. Providing defense services to one does not mean that there is less defense for others since all people continue to use those defense services together. They are also provide to others who do not want them.

This type of good is called a public good because no private could sell national defense to the citizens of a nation and stay in business. This is the free-rider problem and it is the key reason why national defense must be administered by the government and paid for through taxes.

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