12. Software has historically been an artificially scarce good—it is nonrival because the cost of replication is negligible once the investment to write the code is made, but software companies make it excludable by charging for user licenses. Recently, however, open-source software has emerged, most of which is free to download and can be modified and maintained by anyone.

a. Discuss the free-rider problem that might exist in the development of open-source software. What effect might this have on quality? Why does this problem not exist for proprietary software, such as the products of a company like Microsoft or Adobe?

b. Some argue that open-source software serves an unsatisfied market demand that proprietary software ignores.

Draw a typical diagram that illustrates how proprietary software may be underproduced. Put the price and marginal cost of software on the vertical axis and the quantity of software on the horizontal axis. Draw a typical demand curve and a marginal cost curve (MC) that is always equal to zero. Assume that the software company charges a positive price, P, for the software. Label the equilibrium point and the efficient point.