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 underprovided or not provided at all.

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 – benefitting 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 protestors 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 defense, 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 vessals
• Compensation to move away from fishing.

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