Free rider problem

In economics, the free rider problem occurs when those who benefit from resources, goods, or services do not pay for them, which results in either an under-provision of those goods or services, or in an overuse or degradation of a common property resource.^[1] The free rider problem is the question of how to limit free riding and its negative effects in these situations. The free rider problem may occur when property rights are not clearly defined and imposed.^[2] An opposite concept is that of a forced rider.

The free rider problem is common among public goods. These are goods that have two characteristics: non-excludability — once provided it is for everybody; you cannot stop anyone from using it — and non-rivalry — when you consume the good, it does not reduce the amount available to others. The potential for free riding exists when people are asked to voluntarily pay for a public good.

Although the term "free rider" was first used in economic theory of public goods, similar concepts have been applied to other contexts, including collective bargaining, antitrust law, psychology and political science. For example, some individuals in a team or community may reduce their contributions or performance if they believe that one or more other members of the group may free ride.^[3] In a labor union, free riding occurs if an employee pays no union dues or agency shop fees, but benefits from union representation. One free rides to profit from a stock trade without actually using any of his or her own capital.^[4] A common example of a free rider problem is defense spending. No one 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.

The economic problem with free riding

Free riding is considered an economic problem when it leads to the non-production or under-production of a public good, a situation known as a Pareto inefficiency, or when free riding leads to the excessive use of a common property resource. Providing public goods fairly is difficult because the group leadership does not have the required information. When people are asked how much they value a particular public good, with that value measured in terms of how much money they would be willing to pay, their tendency is to underestimate.^[4]

Public goods are characterized by the inability to exclude nonpayers. This problem is compounded by the fact that common-property goods are characterized by rival consumption. Not only can consumers of common-property goods benefit without payment, but consumption by one imposes an opportunity cost on others. This will lead to overconsumption and even possibly exhaustion or destruction of the common-property good. If too many people start to free ride, a system or service will eventually not have enough money to operate.

Possible solutions

Government is the primary agency that societies utilize to address the free rider problem. Regulation is a form of action taken by governments to resolve free rider problems to prevent environmental degradation or excessive resource use. Practical tacts include compulsory participation (taxation) or a form of regulation and linking the public good to a desirable private good (getting people to pay voluntarily).^[5] Governments have imposed taxes when not enough people have voluntarily paid for a public good or service, and some governments have turned a public good into a private one.^[6]

See also

• Assurance contract
• Canadians of convenience
• Game Theory
• Inequity aversion
• Leech (computing)
• Parasitism (social offense)
• Tragedy of the commons
• Ad filtering

Notes

Further reading

• Cornes, Richard; Sandler, Todd (1986). The Theory of Externalities, Public Goods and Club Goods. New York: Cambridge University Press. ISBN 052130184X. 
• Venugopal, Joshi (2005). "Drug imports: the free-rider paradox". Express Pharma Pulse 11 (9): 8.