Free rider problem
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In economics, collective bargaining, and political science, free riders are actors who consume more than their fair share of a resource, or shoulder less than a fair share of the costs of its production. The free rider problem is the question of how to prevent free riding from taking place, or at least limit its negative effects.
Because the notion of 'fairness' is controversial, free riding is usually only considered to be an economic "problem" when it leads to the non-production or under-production of a public good, and thus to Pareto inefficiency, or when it leads to the excessive use of a common property resource.
A common example of a free rider problem is defense spending: no person can be excluded from being defended by a state's military forces, and thus free riders may refuse or avoid paying for being defended, even though they are still as well guarded as those who contribute to the state's efforts. Therefore, it is usual for the government to avoid relying on volunteer donations, using taxes and conscription instead.
In the labor union context, a free rider is an employee who pays no union dues or agency shop fees, but nonetheless receives the same benefits of union representation as dues-payers. Under U.S. law, unions owe a duty of fair representation to all workers they represent, regardless of whether they pay dues. Some jurists have questioned the fairness, if not the legality, of this practice.
Free riding is also a term used by brokerages when a client purchases shares beyond his or her means. In other words free riders are those that purchase shares that do not pay for them. The brokerage also places these trades in "good faith " a trade to be placed when funds are not available in the account. For more information see Margin.
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[edit] Example
Imagine a street in which 25 people are living. There is a chance to install a CCTV system to improve security, the cost of which is $2,500. Each person may be prepared to pay $100 or more for the benefit of extra security. However, since if the system is installed everyone will still benefit, it is quite possible that some people on the street will refuse to pay.
Despite the fact they may be prepared to contribute $100, they will claim that they are not prepared to pay, and instead hope that others in the street will be prepared to pay for the system anyway, and they receive the benefit for no personal expense.
The result is that it is possible no system will be installed, an example of Market Failure. This is despite the fact that allocative efficiency would be improved.
[edit] Solution
The only solution to the problem would be to gather the 25 participants and make them behave like one customer, so the decision is reduced from 25 independent decisions to one. A vote can be taken, but if the answer is yes, everyone will be forced to pay regardless of their individual support. This is why governments almost exclusively provide for public services such as military defense and police service.
[edit] Problems
The solution suggested above is not without its problems. The utility for the 25 people may vary from one person to another, and each person may have a different level of wealth. So in deciding how the cost is split among the people raises important political considerations. A simple even split ($100 each) may not be considered equitable.
[edit] Bargaining
The free rider problem has deep roots in more general bargaining, and issues to do with incentive compatibility. That is to say, that when involving bargaining problems, players may often bid less than they are prepared to pay in the hope of improving their own position. This creates problems because it is impossible to discover the players' true demand payoff curves, and therefore inefficient allocation of resources is likely to ensue.
[edit] See also
- Freighthopping
- Stowaway
- Public good
- CrimethInc
- Tragedy of the commons
- Assurance contracts
- Malibu surfer problem
- Prisoner's Dilemma
- Moral hazard
- Adverse selection
- TANSTAAFL
- Welfare state
- Canadians of convenience
[edit] References
- Richard Cornes and Todd Sandler, The Theory of Externalities, Public Goods and Club Goods 2nd ed. (1996)
- Joshi Venugopal, Drug imports: the free-rider paradox, Express Pharma Pulse, (2005), 11(9), 8. This article refers to the free-rider problem in global pharmaceutical research.[1]
- Antonin Scalia, in dissenting opinion in Lehnert v. Ferris Faculty Assn., 500 U.S. 507 (1991)[2]
