Sec�on A (50 marks)
Answer ALL the Ques�ons
Ques�on 1
1.1 You want to clean up a lake where ten households live. Explain the problem of free riding given
that you want to charge each household the same amount for cleaning the lake. (10)
1.2 Explain what you understand by internalizing ...
1.1: The problem of free riding arises when individuals or households are not
incentivized to contribute to a common good, such as cleaning a lake, because they do
not have to bear the full costs of their actions. In this case, if each household is charged
the same amount for cleaning the lake, some households may not contribute to the
cleaning effort because they think others will do it for them, and they will not have to pay
the full cost.
The lake is a shared resource, and all ten households surrounding it benefit from its
recreational activities, such as fishing, boating, and swimming. However, the lake's
water quality has started to deteriorate due to pollution from various sources, including
sewage, fertilizers, and pesticides from nearby agricultural fields.
The Free Rider Problem:
Each household benefits from the lake's cleanliness and scenic beauty, but they may
not feel a strong incentive to contribute to its upkeep because they assume that others
will take care of it. This is because:
1. Uncertainty: Each household is uncertain about the extent to which others will
contribute to cleaning the lake. If they think others will do it, they may not see a need to
contribute themselves.
2. Low individual costs: Cleaning the lake requires significant effort and resources. For
each household, the individual costs of contributing to cleaning the lake are relatively
low. For example, if a household decides to clean up 100 meters of the lake's shoreline,
they might need to spend R500 on cleaning equipment and R1,000 on labor costs.
3. Non-excludability: The benefits of a clean lake are shared by all households
surrounding it. If one household contributes to cleaning the lake, it's difficult to exclude
others from enjoying the benefits without also cleaning their own part of the lake.
, 4. Lack of accountability : There is no formal system in place to hold individuals or
households accountable for their contributions to cleaning the lake.
Consequences of Free Riding:
As a result of free riding, several consequences can arise:
1. **Under-investment**: The total effort and resources devoted to cleaning the lake
may be lower than what is socially optimal, as each household underestimates the
benefits of contributing to its upkeep.
2. **Inequitable distribution**: The burden of cleaning the lake may fall
disproportionately on a few households that are willing to take on more responsibility,
while others benefit from their efforts without contributing.
3. **Decreased trust**: As households fail to contribute to cleaning the lake, trust among
neighbors may decrease, leading to further social and economic problems.
4. **Negative externalities**: The deterioration of the lake's water quality can have
negative impacts on local wildlife, human health, and property values.
To address these issues, we can consider implementing solutions such as:
1. **Formal agreements**: Establishing a formal agreement among households or
forming a community association can help create accountability and ensure that
everyone contributes their fair share.
2. **Monitoring and enforcement**: Regular monitoring and enforcement mechanisms
can help deter free riding by making individuals accountable for their contributions.
3. **Cost-sharing**: Implementing a cost-sharing system where households contribute
financially or through labor can help distribute the costs more fairly and encourage
everyone to contribute.
4. **Education and awareness**: Raising awareness about the importance of preserving
the lake's water quality and educating households about their individual responsibilities
can help shift attitudes towards collective action.
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