Who is a Free Rider?
A free rider is a person who takes advantage of a public good without paying or expending effort for it. He contributes none towards the production of public goods. Thus, a burden falls on shared resources because of overuse or overexploitation by the people using them free of cost. They utilize the public goods for themselves and expect others to pay. If there were many free riders, facilitating public goods would be dire.
A free rider, in summation, could be someone who receives a benefit of a public good without contributing towards the cost of its production.
Free Rider Problem:
The book ‘The Logic of Collective Action: Public Goods and the Theory of Groups (1965)’ by the American political economist Mancur Olson elaborated on the free rider problem.
The free rider problem or easy rider problem is often a consequence of market failure in economics. The non-equitable distribution of goods and services allows some people to take advantage of resources more than their fair portion or at a lower cost.
It deftly elucidates a scenario where too many people withdraw from paying for a public good or its upkeep, knowing someone would eventually pay for it. They would continue to utilize those services whether or not they pay. When enough people have no motivation to contribute, it leads to market failure.
Free riding throttles the production of goods and services using free-market methods. To the free rider, there is scarely any incentive to pay their fair share for a collective resource since they can enjoy the benefits without paying anything. Therefore, the producer of the resource does not get the due as deserved.
Such a problem germinates because public goods are non-rival as well as non-excludable.
• Non-rival means the supply of public goods does not diminish, even if the consumption of the resource increases. It does not apply to a private good. The internet can be a suitable example of this. Many people can access the internet simultaneously without thinking of its supply at a risk of depletion.
• Non-excludable means that one can not exclude others from consuming the good. Such goods are available for all, regardless of whether they have paid for them. For instance, public roads are available to all for consumption.
It is because of these two essential features some individuals continue to consume public goods by paying nothing towards the cost of financing such goods.
Eventually, a situation would arise where the cost of providing the public good surpasses the benefits to the providers. Subsequently, the incentive to provide the good disappears, notwithstanding its necessity for social welfare.
When the Free Rider Problem Occurs?
The free rider problem in economics stems under certain circumstances when:
- Everyone can consume a resource boundlessly;
- No one can bind anyone else’s amount of consumption and
- The onus falls on someone to produce and maintain the resource.
The underscoring issue is that no business would, in such scenarios, on its own accord, like to produce goods or services. This looming issue of free riders pushes businesses back. It disincentivise them.
Thus, arises two scenarios.
First, the production of shared resources will cease.
Second, a public agency must utilize taxpayer funds to provide such resources.
Example:
- National defense: National defense services are even provided to those not paying taxes to the government.
- Street lighting: You can not exclude people from enjoying the street light if they have not paid for it.