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Economics Terms A-Z

Free Rider Problem

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The free rider problem in economics is a situation where certain individuals benefit from others’ actions for free, and so “free ride” by taking advantage of the situation. This is (usually) fully rational behavior from an economic standpoint. Often, when free riding occurs in a market, it signifies the presence of externalities and means that the good or service is being under-provided or overused. Free riding in economic theory can thus be a symptom of market failure.

Free riding occurs when individuals lack proper incentives to contribute, or cannot be stopped from benefiting from others’ actions. If you maintain a garden and you live close to a bee farm, you will very likely benefit from extra pollination in your garden as a result of the farm’s bee stock.

But, you won’t have to pay for this service, you probably won’t stop the bees from pollinating your garden, and you’re very unlikely to offer to pay for the free pollination you receive. In this scenario, you would be free riding. This is because you’d be enjoying the benefits of a positive externality (pollination) without contributing to the market for beekeeping services.

The garden example is fairly innocuous. However, free riding can be an issue in certain situations, particularly with public property or common resources. In other words, contributing to a public good can often leave incentives to free ride. For example, consider a shared apartment with multiple roommates and a shared kitchen. The kitchen is used by everyone, but nobody “owns” the kitchen; everyone can use it freely.

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As many have experienced, over time the kitchen is likely to degrade significantly. In the absence of any interventions, it will become overused, dirty, and under-cleaned. Dishes will probably pile up in the sink.

This is another example of free riding. The roommates are all incentivized to provide as little cleaning service as possible, and hope that another roommate will do the work for them, saving them time and effort. In this case, cleaning provides a positive externality, and is being under-provided due to free riding behavior.

There are methods to solve the roommate’s kitchen sink problem, and others like it (such as slacking off during a group project, or littering). These include negotiating to create some sort of contract, or building and enforcing social norms. For example, if the roommates agree to a cleaning schedule, social norms are put into place. A roommate who shirks from then on is likely to receive the ire of their roommates, and will suffer socially for their lack of contributions.

Free riding can occur on a larger scale too. An important characteristic of public goods like roads, public transit, national defense, and similar goods and services is that they are non-excludable. This means individuals can’t be easily prevented from using them. These goods and services provide positive externalities but, in a private market, they would be under-provided because individuals would hope that others would pay for it and they could free ride.

Just as with other markets that feature externalities, government intervention is one solution to the problem. Through taxes, governments can pay for public infrastructure, provide national defense, etc. However, it’s not easy for the government to know the optimal amount of each good to be provided, and taxes introduce deadweight loss, so this solution may not be perfect in practice.

Good to Know

The provision of public goods with positive externalities often creates free riding incentives. This scenario can be represented by the Prisoner’s Dilemma.

Imagine a scenario where the dilemma being fought over is not freedom from prison, but cleaning the kitchen, or contributing to a group project. In both cases, an individual’s utility is maximized when the service is provided without them exerting any effort. Thus, everyone’s preferred outcome is one where they defect.

Likewise, free riding when overuse creates a negative externality can be seen in the Tragedy of the Commons scenario. Consider pollution. A factory that pollutes the air or the water in a community creates a negative externality.

Without a government to regulate, it’s likely that cleanup operations will be left to the community members or a non-profit volunteer organization. In this case, the polluting corporation free rides on the cleanup efforts of the community.

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