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What is the free rider problem and how does it occur?

Level:
A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 4 Sept 2023

The free rider problem arises when some individuals or groups benefit from a public good or service without directly paying for it. In essence, free riders enjoy the benefits of a resource or service while avoiding the associated costs.

This can lead to underprovision or underinvestment in public goods and services, potentially resulting in market failures or suboptimal outcomes. The free rider problem occurs due to the characteristics of public goods and the challenge of excluding non-payers from enjoying the benefits.

Here are the key elements of the free rider problem and how it occurs:

Characteristics of Public Goods: To understand the free rider problem, it's important to first consider the characteristics of public goods:

  1. Non-Excludability: Public goods are non-excludable, meaning it is difficult or costly to exclude individuals from using or benefiting from the good once it is provided. This makes it challenging to charge users individually.
  2. Non-Rivalrous Consumption: Public goods are non-rivalrous, meaning one person's consumption of the good does not reduce its availability for others. Multiple individuals can benefit from the same unit of the good simultaneously without diminishing its value.

How the Free Rider Problem Occurs: The free rider problem arises from the combination of non-excludability and non-rivalrous consumption:

  1. Free Access to Benefits: Because public goods are non-excludable, individuals can access and benefit from them without paying. They can "ride for free" on the contributions of others.
  2. Rational Self-Interest: From an individual's perspective, it is often rational to free ride. If a public good is provided regardless of whether an individual contributes financially, they can choose not to pay and still enjoy the benefits. Paying may seem like an unnecessary expense.
  3. Underinvestment: The presence of free riders can lead to underinvestment in the provision of public goods. Providers may struggle to raise sufficient funds to maintain or expand the good, as many potential beneficiaries opt not to contribute.

Examples of the free rider problem

  • Vaccines: When a majority of a population is vaccinated against a disease, the entire community benefits from herd immunity. However, some people may choose not to get vaccinated, effectively "free riding" on the immunity of others.
  • Public transit: People who use public transportation benefit from its existence, but if not enough people use it, the system may not generate enough revenue to support itself, leading to service cuts or higher fares for those who do use it
  • Street lights: People benefit from well-lit streets for safety and convenience, but some may not pay their fair share of the costs through taxes or utility fees
  • Freeloading on WiFi: Some people may piggyback on someone else's WiFi network, using their bandwidth without contributing to the cost of the service.

Here are a few common solutions to the free rider problem:

  • Regulation: Governments can impose rules and regulations to ensure that everyone pays their fair share (e.g., requiring mandatory vaccinations, or fines for not paying taxes).
  • Private provision: Sometimes, a private company or organization can provide the good or service and charge users directly (e.g., toll roads, pay-per-view TV, or private security services).
  • Social norms: Cultivating a sense of community and social responsibility can also help discourage free riding and encourage people to contribute to shared resources.

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