Free Rider Problem

Do you think about how public goods work? Citizens pay a certain amount in taxes and get to use the services they pay for. However, what about the people that don't pay taxes and still use those same goods? Does that seem unfair to you or unjust? If it does, it's because it's a real phenomenon that occurs in economics. Want to learn more about this unjust behavior? Continue reading to learn more about the free rider problem!

Free Rider Problem Free Rider Problem

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Table of contents

    Free Rider Problem Definition

    Let's go over the definition of the free rider problem. The free rider problem occurs when people who benefit from a good use it and avoid paying for it. The free rider problem will occur mainly for goods that are non-excludable. Non-excludable goods mean that there is no way for people to be excluded from obtaining or using a good or service. When people can obtain a good or service for free, like a public good that the government provides, they will likely use it as much as possible.

    A good way to think about the free rider problem is to think of when it may have happened in your life.

    For example, there has probably been a time when you have done a group project in school with a couple of other classmates. You may have noticed that there was always one student in the group that didn't put in as much effort as everyone else did. However, you all got the same grade! The student who didn't put in the same amount of work everyone else did effectively got the same grade for less effort.

    The scenario above provides a rudimentary example of the free rider problem. There was an opportunity for someone to benefit and use a service without having to put in the effort.

    The free rider problem is prevalent in economics and one that requires attention.

    The free rider problem occurs when people who benefit from a good use it and avoid paying for it.

    Free Rider Problem Examples

    What are examples of the free rider problem?

    We will take a look at two examples of the free rider problem here:

    • public library;
    • donations.

    Free rider problem examples: Public Library

    Let's imagine that there's a public library in your neighborhood that everyone loves — it's always well-cleaned and organized. This library is run on local taxes from those that live in the neighborhood. The problem? Recently, people who do not live in the neighborhood have been coming from out of town to use the library. While not a problem in and of itself, these people are outnumbering the locals and not allowing them to use it! The locals are upset because of how crowded the library is getting from people who don't pay for it.

    The free riders here are the people who come from out of town and are using the public good. They are using a service that they are not paying for and ruining it for those that are paying for it. This is an example of the free rider problem.

    Free rider problem examples: Donations

    Let's imagine that your favorite grocery store is run completely on donations — quite an altruistic town! It is an untold rule that everyone who shops there must donate some amount to the grocery store for their excellent service. In fact, their service is so good that they have been recognized in the local newspaper on several occurrences. This sounds like a great, functional system that this grocery store has set up! However, there is one problem that is ruining the store: the free rider problem.

    Word got around that some people were not making donations to the grocery store like they used to. Not only that, but the free riders are starting to outnumber the ones that are donating to the grocery store. Of course, this makes the majority who are making donations upset. Rightfully so, why should they bear the burden while others pay nothing and reap the rewards? This incentivizes those that are making donations to stop since they feel it is unfair. Due to the lack of donations, the grocery store will eventually shut down.

    What happened here? Free riders used a good that they were not paying for. Of course, they were paying for the groceries themselves. However, they were not donating to keep the grocery store up and running. Once people found out, they started to do the same until the grocery store was no longer able to stay open.

    Check out our article on public goods to learn more!

    -Public Goods

    Free Rider Problem Government

    How does the free rider problem relate to the government? First, we must recognize what the government provides that is susceptible to the free rider problem. The goods and services need to be non-rivalrous and non-excludable.

    Non-rivalrous goods are goods that someone can use without preventing someone else from using the same good. Non-excludable goods are goods that are available to everyone. Together, non-rivalrous goods and non-excludable goods are public goods.

    The government provides public goods because the private sector could not provide such goods without a market failure. This is because there is a very low demand for public goods — there is minimal profitability for private firms. Therefore, the government provides most public goods since it does not have to worry about profit.

    An example of a public good that is non-rivalrous and non-excludable is public roads. Public roads are non-rivalrous because someone driving on the road does not prevent another person from driving on the same road. Public roads are also non-excludable because there is no way to diminish the amount for someone using a road once it is built by the government.

    Now that we understand what government goods are susceptible to the free rider problem, we can see how free riders utilize these goods.

    In the case of public roads that are paid for by taxpayers, free riders can only be people who don't pay taxes to the United States government. People who are visiting from other countries and use the public roads would be considered free riders since they are using a good that they are not paying for.

    As we can see, when people visit from other countries and use public roads, they are considered free riders. This can apply to any government good or service that is non-excludable and non-rivalrous.

    Non-rivalrous goods are goods that someone can use without preventing someone else from using the same good.

    Non-excludable goods are goods that are available to everyone.

    Free Rider Problem Public Road StudySmarterFig. 1 - Public Road

    Want to learn more about market failure? Check out this article:

    - Market Failure

    Free Rider Problem vs. Tragedy of the Commons

    Free rider problem vs. tragedy of the commons: what are the differences? Recall that the free rider problem occurs when people use a good that they are not paying for themselves. The tragedy of the commons occurs when a good is overused and degraded in quality. The tragedy of the commons occurs for goods that are non-excludable but rivalrous.

    For example, say that there is a pond where people are welcome to fish free of charge. For a few years, this pond was used by people in the area. However, people from out of town came and started using the pond. Now, locals and out-of-town people are using the same pond that is free to use. This may seem like no big deal; however, before they knew it, the pond no longer had any fish! Too many people used the pond too much and degraded the quality of the pond for everyone else.

    The tragedy of the commons involves a good that anyone can use (non-excludable) and will degrade in quality by overusing it (rivalrous). The free rider problem only involves people using a good that anyone can use and that they are not paying for. The main difference between the tragedy of the commons and the free rider problem is that the tragedy of the commons will have people using a good too much to the point it degrades in quality for others, while the free rider problem only involves using a good that is not paid for by the user.

    The tragedy of the commons occurs when a good is overused and degraded in quality.

    Want to learn more about the tragedy of the commons? Check out our article:

    - Tragedy of the Commons

    Free Rider Problem Solutions

    Let's discuss some potential solutions to the free rider problem. Recall that the free rider problem occurs when people benefit from a good or service that they are not paying for. One quick solution is to privatize the good that is being overused by the public.

    For example, say that a public museum run on local taxes is being used by the general public. However, there is no longer enough space for people to use the public park due to free riders. If the park was privatized so that it can only be accessed by those who pay a fee, then you would fix the issue of free riders using a good for free while others pay for the good.

    A quick solution, but it does leave out those that were using the park responsibly that may not be able to pay the fee of a privatized good.

    In addition to privatizing a public good, the government can step in when a good is being overused to ameliorate the issue.

    We can use the example of the public museum once more. Rather than privatizing the public good to avoid the free rider problem, the government can step in and regulate the public good instead. For example, the government can ask people who are entering the museum for proof of residency, so they can see who actually lives in the area and contributes to taxes. A quota may also be used by the government to limit the crowding of the public good as well.

    This is another example of fixing the free rider problem. However, government regulation can be difficult to get right when it comes to a public good. What is the "right" quota that the government should implement? How will the government enforce the regulation? How will the regulation be monitored? These are all important questions when it comes to solving the free rider problem.

    Free Rider Problem Graph

    What does a free rider problem graph look like? We can view a free rider problem on a graph based on the willingness to pay for a public good depending on individual income.

    Free Rider Problem Free Rider Public Good Graph StudySmarterFig. 2 - Free Rider Public Good Graph1

    What does the graph above show? The x-axis shows pollution, and the y-axis shows the willingness to pay. Therefore, the graph shows the relationship between pollution and willingness to pay for different income levels. As we can see, the more someone earns, the more they are willing to pay to decrease pollution. In contrast, the less someone earns, the less they are willing to pay to decrease pollution. This is insightful because it shows that if people were to pay for clean air, some would pay more than others, yet everyone would benefit the same since clean air is non-excludable and non-rivalrous. Therefore, it would result in a market failure if the government did not provide clean air as a public good.

    Free Rider Problem - Key takeaways

    • The free rider problem occurs when people who benefit from a good use it and avoid paying for it.
    • Government goods that are susceptible to the free rider problem are non-rivalrous and non-excludable.
    • The tragedy of the commons is when a good is being overused and degraded in quality.
    • Goods susceptible to the tragedy of the commons are rivalrous and non-excludable.
    • Solutions to the free rider problem include privatizing a public good and government regulation.

    References

    1. David Harrison, Jr., and Daniel L. Rubinfeld, “Hedonic Housing Prices and the Demand for Clean Air,” Journal of Environmental Economics and Management 5 (1978): 81–102
    Frequently Asked Questions about Free Rider Problem

    What is free rider problem?

    A free rider problem occurs when someone uses a good and does not pay for it.

    Why is free rider a type of market failure?

    Free rider is a type of market failure because people have an incentive to not pay for a good and use it, rather than pay for a good. The market can't provide an efficient outcome since suppliers don't want to produce something that people aren't paying for.

    How do you solve the free rider problem?

    You can solve the free rider problem by privatizing a public good or by government regulation.

    What causes the free rider problem?

    The free rider problem is caused when people don't pay for a good and use it anyways.

    What is an example of free rider problem?

    An example of a free rider problem is people using a public good that they are not paying for. Example: a library funded by local tax payers that is being used by people who don't live in the town.

    Test your knowledge with multiple choice flashcards

    A good susceptible to the free rider problem has which characteristics?

    A good susceptible to the tragedy of the commons has which characteristics?

    Public roads are known as a good that is ______ and ______.

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