What Is the Free Rider Problem?
The free rider problem is the burden on a shared resource that is created by its use or overuse by people who aren’t paying their fair share for it or aren’t paying anything at all.
The free rider problem can occur in any community, large or small. In an urban area, a city council may debate whether and how to force suburban commuters to contribute to the upkeep of its roads and sidewalks or the protection of its police and fire services. A public radio or broadcast station devotes airtime to fundraising in hopes of coaxing donations from listeners who aren’t contributing.
- Free riding is considered a failure of the conventional free market system.
- The problem occurs when some members of a community fail to contribute their fair share to the costs of a shared resource.
- Their failure to contribute makes the resource economically infeasible to produce.
Understanding the Free Rider Problem
The free rider problem is an issue in economics. It is considered an example of a market failure. That is, it is an inefficient distribution of goods or services that occurs when some individuals are allowed to consume more than their fair share of the shared resource or pay less than their fair share of the costs.
Free riding prevents the production and consumption of goods and services through conventional free-market methods. To the free rider, there is little incentive to contribute to a collective resource since they can enjoy its benefits even if they don’t. As a consequence, the producer of the resource cannot be sufficiently compensated. The shared resource must be subsidized in some other way, or it will not be created.
When the Free Rider Problem Arises
The free rider problem as an economics issue only occurs under certain conditions:
- When everyone can consume a resource in unlimited amounts.
- When no one can limit anyone else’s consumption.
- When someone has to produce and maintain the resource. That is, it’s not a natural lake, it’s a swimming pool, and someone had to undertake its construction and maintenance.
Economists point out that no business would voluntarily produce goods or services under these conditions. When the free rider problem looms, businesses back away. Either the shared resource will not be provided, or a public agency must provide it using taxpayer funds.
As an economic issue, the problem occurs when everyone can consume a resource in unlimited amounts, no one can limit anyone else’s consumption, but someone has to produce and maintain the resource.
On the positive side, some people in every community will demonstrate that they feel a responsibility to pay their fair share. Some combination of a high sense of trust, positive reciprocity, and a sense of collective duty makes them willing to pay their fair share.
The free rider problem can crop up when the resource is shared by all and free to all. Like air. If a community sets voluntary pollution standards that encourage all residents to cut back on carbon-based fuels, many will respond positively. But some will refuse to make any change in their habits. If enough follow the standards, the air quality will improve and all the residents will benefit equally, even the free riders.
Solutions to the Free Riding Problem
Communities that face a free riding problem may try any of several solutions.
- Government addresses the problem by collecting and distributing tax dollars to subsidize public services. Theoretically, taxes are proportionate to income, so fair cost-sharing can be achieved.
- Communities can turn their public resource into a private or club resource, charging dues to make sure everyone who uses it contributes to it.
- Communities can impose a small fee on everyone. This will limit over-consumption and, over time, may even spur altruistic behavior. That is, many people may like the idea of making a small contribution to a resource that they use.
View more information: https://www.investopedia.com/terms/f/free_rider_problem.asp