In economics, the free-rider problem occurs
when those who benefit from resources, public
goods, or services do not pay for them, which
results in an underprovision of those goods
or services.
For example, a free-rider may frequently ask
for available parking lots (public goods)
from those who have already paid for them,
in order to benefit from free parking.
That is, the free-rider may use the parking
even more than the others without paying a
penny.
The free-rider problem is the question of
how to limit free riding and its negative
effects in these situations.
The free-rider problem may occur when property
rights are not clearly defined and imposed.The
free-rider problem is common with goods which
are non-excludable, including public goods
and situations of the Tragedy of the Commons.
Although the term "free rider" was first used
in economic theory of public goods, similar
concepts have been applied to other contexts,
including collective bargaining, antitrust
law, psychology and political science.
For example, some individuals in a team or
community may reduce their contributions or
performance if they believe that one or more
other members of the group may free ride.
== The economic problem with free riding ==
Free riding is a problem of economic inefficiency
when it leads to the under-production or over-consumption
of a good.
For example, when people are asked how much
they value a particular public good, with
that value measured in terms of how much money
they would be willing to pay, their tendency
is to under report their valuations.Goods
which are subject to free riding are usually
characterized by the inability to exclude
nonpayers.
This problem is sometimes compounded by the
fact that common-property goods are characterized
by rival consumption.
Not only can consumers of common-property
goods benefit without payment, but consumption
by one imposes an opportunity cost on others.
This will lead to overconsumption and even
possibly exhaustion or destruction of the
common-property good.
If too many people start to free ride, a system
or service will eventually not have enough
resources to operate.
The other problem of free-riding is experienced
when the production of goods does not consider
the external costs, particularly the use of
ecosystem services.
== Economic and political solutions ==
=== Assurance contracts ===
An assurance contract is a contract in which
participants make a binding pledge to contribute
to building a public good, contingent on a
quorum of a predetermined size being reached.
Otherwise the good is not provided and any
monetary contributions are refunded.
A dominant assurance contract is a variation
in which an entrepreneur creates the contract
and refunds the initial pledge plus an additional
sum of money if the quorum is not reached.
(The entrepreneur profits by collecting a
fee if the quorum is reached and the good
is provided.)
In game-theoretic terms this makes pledging
to build the public good a dominant strategy:
the best move is to pledge to the contract
regardless of the actions of others.
=== Coasian solution ===
A Coasian solution, named for the economist
Ronald Coase, proposes that potential beneficiaries
of a public good can negotiate to pool their
resources and create it, based on each party's
self-interested willingness to pay.
His treatise, "The Problem of Social Cost"
(1960), argued that if the transaction costs
between potential beneficiaries of a public
good are low—that it is easy for potential
beneficiaries to find each other and organize
a pooling their resources based upon the good's
value to each of them—that public goods
could be produced without government action.
Much later, Coase himself wrote that while
what had become known as the Coase Theorem
had explored the implications of zero transaction
costs, he had actually intended to use this
construct as a stepping-stone to understand
the real world of positive transaction costs,
corporations, legal systems and government
actions:I examined what would happen in a
world in which transaction costs were assumed
to be zero.
My aim in doing so was not to describe what
life would be like in such a world but to
provide a simple setting in which to develop
the analysis and, what was even more important,
to make clear the fundamental role which transaction
costs do, and should, play in the fashioning
of the institutions which make up the economic
system.Coase also wrote:The world of zero
transaction costs has often been described
as a Coasian world.
Nothing could be further from the truth.
It is the world of modern economic theory,
one which I was hoping to persuade economists
to leave.
What I did in "The Problem of Social Cost"
was simply to shed light on some of its properties.
I argued in such a world the allocation of
resources would be independent of the legal
position, a result which Stigler dubbed the
"Coase theorem".Thus, while Coase himself
appears to have considered the "Coase theorem"
and Coasian solutions as simplified constructs
to ultimately consider the real 20th-century
world of governments and laws and corporations,
these concepts have become attached to a world
where transaction costs were much lower, and
government intervention would unquestionably
be less necessary.
A minor alternative, especially for information
goods, is for the producer to refuse to release
a good to the public until payment to cover
costs is met.
Author Stephen King, for instance, authored
chapters of a new novel downloadable for free
on his website while stating that he would
not release subsequent chapters unless a certain
amount of money was raised.
Sometimes dubbed holding for ransom, this
method of public goods production is a modern
application of the street performer protocol
for public goods production.
Unlike assurance contracts, its success relies
largely on social norms to ensure (to some
extent) that the threshold is reached and
partial contributions are not wasted.
One of the purest Coasian solutions today
is the new phenomenon of Internet crowdfunding.
Here rules are enforced by computer algorithms
and legal contracts as well as social pressure.
For example, on the Kickstarter site, each
funder authorizes a credit card purchase to
buy a new product or receive other promised
benefits, but no money changes hands until
the funding goal is met.
Because automation and the Internet so reduce
the transaction costs for pooling resources,
project goals of only a few hundred dollars
are frequently crowdfunded, far below the
costs of soliciting traditional investors.
=== Government provision ===
If voluntary provision of public goods will
not work, then the solution is making their
provision involuntary.
This saves each of us from our own tendency
to be a free rider, while also assuring us
that no one else will be allowed to free ride.
One frequently proposed solution to the problem
is for governments or states to impose taxation
to fund the production of public goods.
This does not actually solve the theoretical
problem because good government is itself
a public good.
Thus it is difficult to ensure the government
has an incentive to provide the optimum amount
even if it were possible for the government
to determine precisely what amount would be
optimum.
These issues are studied by public choice
theory and public finance.
Sometimes the government provides public goods
using "unfunded mandates".
An example is the requirement that every car
be fit with a catalytic converter.
This may be executed in the private sector,
but the end result is predetermined by the
state: the individually involuntary provision
of the public good clean air.
Unfunded mandates have also been imposed by
the U.S. federal government on the state and
local governments, as with the Americans with
Disabilities Act, for example.
Regardless the role of the government is provide
vital goods to all individuals, some of which
they cannot obtain on themselves.
In order to ensure that government services
are properly funded taxes and other government
controlled entities are enforced.
Although enforced taxes deter the free-rider
problem many contend that some goods should
be excluded and made into private goods.
However, this not possible with all goods
such as pure public goods that are inseparable
and inclusive, thus require "provision by
public means".
In short, the government has a responsibility
to ensure that the social welfare of individuals
is met as opposed to privatized goods.
=== Subsidies and joint products ===
A government may subsidize production of a
public good in the private sector.
Unlike government provision, subsidies may
result in some form of a competitive market.
The potential for cronyism (for example, an
alliance between political insiders and the
businesses receiving subsidies) can be limited
with secret bidding for the subsidies or application
of the subsidies following clear general principles.
Depending on the nature of a public good and
a related subsidy, principal–agent problems
can arise between the citizens and the government
or between the government and the subsidized
producers; this effect and counter-measures
taken to address it can diminish the benefits
of the subsidy.
Subsidies can also be used in areas with a
potential for non-individualism: For instance,
a state may subsidize devices to reduce air
pollution and appeal to citizens to cover
the remaining costs.
Similarly, a joint-product model analyzes
the collaborative effect of joining a private
good to a public good.
For example, a tax deduction (private good)
can be tied to a donation to a charity (public
good).
It can be shown that the provision of the
public good increases when tied to the private
good, as long as the private good is provided
by a monopoly (otherwise the private good
would be provided by competitors without the
link to the public good).
=== Privileged group ===
The study of collective action shows that
public goods are still produced when one individual
benefits more from the public good than it
costs him to produce it; examples include
benefits from individual use, intrinsic motivation
to produce, and business models based on selling
complement goods.
A group that contains such individuals is
called a privileged group.
A historical example could be a downtown entrepreneur
who erects a street light in front of his
shop to attract customers; even though there
are positive external benefits to neighboring
nonpaying businesses, the added customers
to the paying shop provide enough revenue
to cover the costs of the street light.
The existence of privileged groups may not
be a complete solution to the free rider problem,
however, as underproduction of the public
good may still result.
The street light builder, for instance, would
not consider the added benefit to neighboring
businesses when determining whether to erect
his street light, making it possible that
the street light isn't built when the cost
of building is too high for the single entrepreneur
even when the total benefit to all the businesses
combined exceeds the cost.
An example of the privileged group solution
could be the Linux community, assuming that
users derive more benefit from contributing
than it costs them to do it.
For more discussion on this topic see also
Coase's Penguin.
Another example is those musicians and writers
who create music and writings for their own
personal enjoyment, and publish because they
enjoy having an audience.
Financial incentives are not necessary to
ensure the creation of these public goods.
Whether this creates the correct production
level of writings and music is an open question.
=== Merging free riders ===
Another method of overcoming the free rider
problem is to simply eliminate the profit
incentive for free riding by buying out all
the potential free riders.
A property developer that owned an entire
city street, for instance, would not need
to worry about free riders when erecting street
lights since he owns every business that could
benefit from the street light without paying.
Implicitly, then, the property developer would
erect street lights until the marginal social
benefit met the marginal social cost.
In this case, they are equivalent to the private
marginal benefits and costs.
While the purchase of all potential free riders
may solve the problem of underproduction due
to free riders in smaller markets, it may
simultaneously introduce the problem of underproduction
due to monopoly.
Additionally, some markets are simply too
large to make a buyout of all beneficiaries
feasible—this is particularly visible with
public goods that affect everyone in a country.
=== Introducing an exclusion mechanism (club
goods) ===
Another solution, which has evolved for information
goods, is to introduce exclusion mechanisms
which turn public goods into club goods.
One well-known example is copyright and patent
laws.
These laws, which in the 20th century came
to be called intellectual property laws, attempt
to remove the natural non-excludability by
prohibiting reproduction of the good.
Although they can address the free rider problem,
the downside of these laws is that they imply
private monopoly power and thus are not Pareto-optimal.
For example, in the United States, the patent
rights given to pharmaceutical companies encourage
them to charge high prices (above marginal
cost) and to advertise to convince patients
to persuade their doctors to prescribe the
drugs.
Likewise, copyright provides an incentive
for a publisher to act like The Dog in the
Manger, taking older works out of print so
as not to cannibalize revenue from the publisher's
own new works.The laws also end up encouraging
patent and copyright owners to sue even mild
imitators in court and to lobby for the extension
of the term of the exclusive rights in a form
of rent seeking.
These problems with the club-good mechanism
arise because the underlying marginal cost
of giving the good to more people is low or
zero, but, because of the limits of price
discrimination those who are unwilling or
unable to pay a profit-maximizing price do
not gain access to the good.
If the costs of the exclusion mechanism are
not higher than the gain from the collaboration,
club goods can emerge naturally.
James M. Buchanan showed in his seminal paper
that clubs can be an efficient alternative
to government interventions.On the other hand,
the inefficiencies and inequities of club
goods exclusions sometimes cause potentially
excludable club goods to be treated as public
goods, and their production financed by some
other mechanism.
Examples of such "natural" club goods include
natural monopolies with very high fixed costs,
private golf courses, cinemas, cable television
and social clubs.
This explains why many such goods are often
provided or subsidized by governments, co-operatives
or volunteer associations, rather than being
left to be supplied by profit-minded entrepreneurs.
These goods are often known as social goods.
Joseph Schumpeter claimed that the "excess
profits", or profits over normal profit, generated
by the copyright or patent monopoly will attract
competitors that will make technological innovations
and thereby end the monopoly.
This is a continual process referred to as
"Schumpeterian creative destruction", and
its applicability to different types of public
goods is a source of some controversy.
The supporters of the theory point to the
case of Microsoft, for example, which has
been increasing its prices (or lowering its
products' quality), predicting that these
practices will make increased market shares
for Linux and Apple largely inevitable.A nation
can be seen as a club whose members are its
citizens.
Government would then be the manager of this
club.
This is further studied in the Theory of the
State.
== Altruistic solutions ==
=== Social norms ===
When enough people do not think like free-riders,
the private and voluntary provision of public
goods may be successful.
For example, a free rider might come to a
public park to enjoy its beauty, yet discard
litter that makes it less enjoyable for others.
Other public-spirited individuals don't do
this and might even pick up existing litter.
Reasons for the act could be that the person
derives pleasure from helping their community,
feels ashamed if their neighbors or friends
saw them, or could be emotionally attached
to the public good.
People unconsciously adapt their behavior
to that of their peers; this is conformity.
Even people who engaged in free-riding by
littering elsewhere are less likely to if
they see others hold on to their trash.
Social norms can be observed wherever people
interact, not only in physical spaces but
in virtual communities on the Internet.
For example, if a disabled person boards a
crowded bus, everyone expects that some able-bodied
person will volunteer their seat.
The same social norm, although executed in
a different environment, can also be applied
to the Internet.
If a user enters a discussion in a chat room
and continues to use all capital letters or
to make personal attacks ("flames") when addressing
other users, the culprit may realize he or
she has been blocked by other participants.
As in real life, users learning to adapt to
the social norms of cyberspace communities
provide a public good—here, not suffering
disruptive online behavior—for all the participants.
=== Social sanctions (punishment) ===
Experimental literature suggests that free
riding can be overcome without any state intervention.
Peer-to-peer punishment, that is, members
sanction those members that do not contribute
to the public good at a cost, is sufficient
to establish and maintain cooperation.
Such punishment is often considered altruistic,
because it comes at a cost to the punisher,
however, the exact nature remains to be explored.
Whether costly punishment can explain cooperation
is disputed.
Recent research finds that costly punishment
is less effective in real world environments.
For example, punishment works relatively badly
under imperfect information, where people
cannot observe the behavior of others perfectly.
=== Voluntary organizations ===
Organizations such as the Red Cross, public
radio and television or a volunteer fire department
provide public goods to the majority at the
expense of a minority who voluntarily participate
or contribute funds.
Contributions to online collaborative media
like Wikipedia and other wiki projects, and
free software projects such as Linux are another
example of relatively few contributors providing
a public good (information) freely to all
readers or software users.
Proposed explanations for altruistic behavior
include biological altruism and reciprocal
altruism.
For example, voluntary groups such as labor
unions and charities often have a federated
structure, probably in part because voluntary
collaboration emerges more readily in smaller
social groups than in large ones (e.g., see
Dunbar's number).
While both biological and reciprocal altruism
are observed in other animals, our species'
complex social behaviors take these raw materials
much farther.
Philanthropy by wealthy individuals—some,
such as Andrew Carnegie giving away their
entire vast fortunes—have historically provided
a multitude of public goods for others.
One major impact was the Rockefeller Foundation's
development of the "Green Revolution" hybrid
grains that probably saved many millions of
people from starvation in the 1970s.
Christian missionaries, who typically spend
large parts of their lives in remote, often
dangerous places, have had disproportionate
impact compared with their numbers worldwide
for centuries.
Communist revolutionaries in the 20th century
had similar dedication and outsized impacts.
International relief organizations such as
Doctors Without Borders, Save the Children
and Amnesty International have benefited millions,
while also occasionally costing workers their
lives.
For better and for worse, humans can conceive
of, and sacrifice for, an almost infinite
variety of causes in addition to their biological
kin.
=== Religions and ideologies ===
Voluntary altruistic organizations often motivate
their members by encouraging deep-seated personal
beliefs, whether religious or other (such
as social justice or environmentalism) that
are taken "on faith" more than proved by rational
argument.
When individuals resist temptations to free
riding (e.g., stealing) because they hold
these beliefs (or because they fear the disapproval
of others who do), they provide others with
public goods that might be difficult or impossible
to "produce" by administrative coercion alone.
One proposed explanation for the ubiquity
of religious belief in human societies is
multi-level selection: altruists often lose
out within groups, but groups with more altruists
win.
A group whose members believe a "practical
reality" that motivates altruistic behavior
may out-compete other groups whose members'
perception of "factual reality" causes them
to behave selfishly.
A classic example is a soldier's willingness
to fight for his tribe or country.
Another example given in evolutionary biologist
David Sloan Wilson's Darwin's Cathedral is
the early Christian church under the late
Roman Empire; because Roman society was highly
individualistic, during frequent epidemics
many of the sick died not of the diseases
per se but for lack of basic nursing.
Christians, who believed in an afterlife,
were willing to nurse the sick despite the
risks.
Although the death rate among the nurses was
high, the average Christian had a much better
chance of surviving an epidemic than other
Romans did, and the community prospered.
Religious and non-religious traditions and
ideologies (such as nationalism and patriotism)
are in full view when a society is in crisis
and public goods such as defense are most
needed.
Wartime leaders invoke their God's protection
and claim that their society's most hallowed
traditions are at stake.
For example, according to President Abraham
Lincoln's Gettysburg Address during the American
Civil War, the Union was fighting so "that
government of the people, by the people, for
the people, shall not perish from the earth".
Such voluntary, if exaggerated, exhortations
complement forcible measures—taxation and
conscription—to motivate people to make
sacrifices for their cause.
== See also ==
Forced rider
Leech (computing)
Parasitism (social offense)
The Logic of Collective Action
Moral hazard
== Notes ==
== Further reading ==
Cornes, Richard; Sandler, Todd (1986).
The Theory of Externalities, Public Goods
and Club Goods.
New York: Cambridge University Press.
ISBN 052130184X.
William D. Nordhaus, "A New Solution: the
Climate Club" (a review of Gernot Wagner and
Martin L. Weitzman, Climate Shock: The Economic
Consequences of a Hotter Planet, Princeton
University Press, 250 pp, $27.95), The New
York Review of Books, vol.
LXII, no.
10 (June 4, 2015), pp. 36–39.
Venugopal, Joshi (2005).
"Drug imports: the free-rider paradox".
Express Pharma Pulse.
11 (9): 8.
P. Oliver – Sociology 626 published by Social
Science Computing Cooperative University of
Wisconsin
