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.
  • Another way to explain the free-rider problem is a slogan like “Let George do it” – where George stands for the rest of the world.

More on Definition of Free Rider Problem

The free rider problem is common in goods with non-excludable benefits, e.g. if you reduce pollution, everyone in society will benefit. Once pollution is reduced everyone has to benefit.

Examples of free rider problem

It is good to reduce our production of landfill rubbish. However, if one person in a city of five million produces less rubbish, it makes little difference. There is an incentive to free-ride on efforts of other people to recycle and make less effort yourself. In other words, we free ride on the efforts of others to recycle.

Clean a common kitchen area. It would be good if we all contributed to cleaning the kitchen but there is a temptation to leave for one person who will do it all for us.

Public Good and a Free Rider Problem

A public good has a classic free rider problem because public goods have 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. – This is 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 and government provision

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.

Austrian economists may criticise this approach arguing there is no guarantee the government knows consumer preferences and coervice action to make everyone pay and provide the good could lead to goods society doesn’t really need.

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 probably be many ‘free riders’ who don’t make a 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.

Free-rider problem theory

Welfare Economics and the Theory of the State (1952) William Baumol – makes case for government provision of public goods in areas where there is free-rider problem

Logic of Collective Action (1965) Mancur Olson. Olson noted the mismatch between individual incentives and the collective interest of society.

Theory of public goods (1954) Paul Samuelson. Samuelson noted how once public goods were provided they can be consumed at zero marginal cost.

An Economic Theory of Democracy (1957) Anthony Downs

“Provision of national defense is a boon to every citizen; even if one citizen paid for it solely out of his own pocket, all the others would gain from it. Where citizens are numerous, each man finds it advantageous to refuse to pay for such indivisible benefits. Instead he assumes that other men will bear the cost and he will benefit… This situation means that voluntary action cannont produce a Paerian optimum in a large society when collective goods exit. (p.170)

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5 thoughts on “Free Rider Problem

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

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

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