Free Rider Problem

Definition of The Free Rider Problem. This occurs when people can enjoy a good service without paying anything (or making a small contribution less than their benefit.) If enough people can enjoy a good without paying for the cost then there is a danger that, in a free market, the good will be under-provided or not provided at all.

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Public Good and a Free Rider Problem

A public good has a classic free rider problem because the good has two characteristics:

  1. Non-excludability – can’t stop anyone from consuming good
  2. Non-rivalry – benefiting from good or service does not reduce the amount available to others.

Therefore, public goods like national defence, street lighting, beautiful gardens may not be provided in a free market.

A free rider problem is also said to occur when there is overconsumption of shared resources. – Also known as  The Tragedy of the Commons. For example, a fisherman may take a high catch and free ride on other fishermen who are more concerned to preserve sustainable fish stocks.

Solutions to Free Rider Problem

1. Tax.

One solution is to treat the many beneficiaries as one consumer and then divide the cost equally. For example, UK national defence costs £31bn. This results in higher taxes for UK taxpayers. Therefore the cost of national defence is paid indirectly by UK taxpayers. This ensures everyone who benefits from the service pays towards the cost. Some may dislike this approach e.g. some anti-war protesters have tried to withhold a certain % of their tax arguing they don’t want to make contributions to illegal wars. But, most people accept paying taxes.

2. Appealing To People’s Altruism.

For some goods like visiting a garden, the garden may be able to raise funds by asking for donations if you enjoy your visit. There will be probably be many ‘free riders’ who don’t make donation. But, enough people may be willing to make a donation to fund the cost of the garden / museum. This solution is only effective for services which have relatively low cost. People don’t mind paying £4 if other’s free ride. But, if there was a voluntary donation of £1,000 for national defence, would anyone pay it?

3. Make A Public Good private.

A beautiful garden could be seen as a public good. However, if you erect a high barrier and limit entrance to those willing to pay, it loses its feature as a public good and becomes a private good.

4. Legislation

To deal with the free rider problem associated with overconsumption of common resources. The government have tried various options such as:

  • Quotes – difficult to implement and difficult to monitor
  • Legislation – on size of net size, number of fishing vessels
  • Compensation to move away from fishing.

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5 Responses to Free Rider Problem

  1. sarbani deb June 18, 2011 at 9:09 am #

    its very good for student to avail these kind of help online it helps a lot for beginners of economics.

  2. john pandol November 10, 2011 at 6:47 am #

    The free rider problem is the reason trade associations of agricultural commodities are cumpulsory by law and are entities of the state. Eg grapes in california are a huge part of its GDP, trade associations that promote the industry as a whole wouldnt exist b/c of the freerider problem if they wernt compulsory by law. 120 billion dollars with the law, 60 billion without, not to help growers necessarily but to make max use of the resource
    (ability to grow grapes) it has.

  3. Coronet March 27, 2012 at 6:14 am #

    Hi!!
    Could you pleas tell me some example of Free-rider problem ( in Banking and Finance)?
    Thanks!!!

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