People who use goods without paying for their use are known as free riders. The term was first used in The Logic of Collective Action: Public Goods by Mancur Olson. Free riders can negatively affect the economy and lead to a lack of collective goods that benefit everyone.
What is the Free Rider Problem?
The free rider problem is an economic term that describes a scenario where people benefit from resources like goods and services without paying for them. In a worst-case scenario, free riding can lead to market failure when a large volume of free riders consume goods and services. The free rider problem usually arises when it comes to public goods, which are goods one person can consume without creating a lack of availability for others. Public goods are also non-excludable, meaning individuals or groups can’t be excluded from consuming the goods.
Since public goods don’t have any consumption limits, excess use can impact the producer. The main issue with free riding is people don’t have an incentive to contribute even though they benefit from the product or service. This can lead to private companies choosing not to create collective goods everyone can benefit from. It can also lead to the decline of existing goods or services because the free rider isn’t contributing.
Free Rider Problem
Private companies and entrepreneurs don’t gravitate towards collective goods because of the free rider problem. Said goods don’t tend to be profitable, which is why they’re more likely to focus on the production of private goods. Consequently, public goods become the responsibility of the government. This isn’t entirely free, however, as the government funds public goods via taxation. That said, not everyone pays taxes, hence the free riding.
Examples of the Free Rider Problem
There are various everyday examples of the free rider problem and it can happen across various sectors.
Let’s say a local community initiative decides to plant a public vegetable garden. They may decide to pool together money from residents to fund the garden but everyone may not contribute. Despite the lack of contributions, the garden may still be built and those who contribute are at a loss when free riders benefit from the garden. Those free riders also won’t contribute to the garden upkeep, which can lead to further loss or the garden being abandoned.
The national defense is another scenario where free riding can happen. All citizens of a country benefit from national defense but not everyone contributes via taxes.
Solving the Free Rider Problem
To reduce the likelihood of the free rider problem, incentives can be offered. For those who aren’t influenced by altruistic values, this can be a way to get them to contribute. An example of an incentive is to offer plaques to individuals who contribute to museums. That said, it can be difficult to get people to contribute when they can freely enjoy the goods or service.
Taxes are another way to minimize the free rider problem. As mentioned earlier, money from taxes is often used to fund publicly used things like street lights, public schools, the police and highways. Requiring every citizen to pay taxes is a way to ensure everyone contributes something.
Another solution could be privatizing public services so they’re not accessible to everyone. For example, public parks, tennis courts, or pools could be restricted to residents who live in the area. Whether the free-rider problem is serious enough to warrant privatization is up to policy-makers.
