There Are 3,000 Families in a Small Town That Are

question 155

Multiple Choice

There are 3,000 families in a small town that are affected by air pollution from a local factory. The air pollution could be reduced if the company spent $10,000 on upgraded ventilators. The company agrees to install the ventilators if the affected families contribute the $10,000. However, because individuals will benefit from the reduction in air pollution whether they contribute or not, most people will not contribute and the firm will not install the ventilators. This outcome is an example of the

• A) free-rider problem.
• B) drop-in-the-bucket problem.
• C) Coase theorem.
• D) collective action problem (that arises when there are too many parties involved).

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Definitions:

Franchising

A business model where a franchisor licenses its trade name and operating methods to a franchisee in exchange for a fee and ongoing royalties.

Contractual Arrangement

An agreement between parties that is enforced by law, specifying the duties and rights of each party.

Parent Company

A corporation that owns enough voting stock in another company to control management and operations by influencing or electing its board of directors.

Backward Integration

A business strategy where a company expands its role to fulfill tasks formerly completed by businesses up the supply chain.