In Economics The Term Free Rider Refers To

In economics, the term free rider refers to an individual or entity that benefits from a good or service without contributing to its cost. This behavior creates a market failure because it leads to an under-provision of the good or service in question. Understanding the concept of free riders is crucial for comprehending public goods, externalities, and the role of government intervention in markets.

The Essence of Free Riding

At its core, free riding hinges on two key characteristics of a good or service: non-excludability and non-rivalry.

Non-excludability means that once the good or service is provided, it's impossible or extremely difficult to prevent anyone from consuming it, regardless of whether they've paid for it or not.
Non-rivalry implies that one person's consumption of the good or service doesn't diminish its availability to others.

When both these conditions are present, the incentive to free ride becomes powerful. Why pay for something if you can enjoy it anyway?

Examples of Free Rider Situations

Free rider problems arise in various contexts. Here are some common examples:

Public Broadcasting: Public radio or television stations often rely on donations. However, anyone with an antenna can tune in, whether they donate or not. This creates a free rider problem, as individuals can enjoy the programming without contributing to its funding.
National Defense: The protection provided by a nation's military benefits all citizens, regardless of whether they pay taxes or support the military. It's impossible to exclude someone from this protection simply because they haven't directly contributed.
Environmental Protection: Efforts to reduce air pollution or protect endangered species benefit everyone in the affected area, regardless of their individual contributions to those efforts. A company might hesitate to invest in cleaner technology if its competitors can free ride on the improved air quality without incurring the same costs.
Open-Source Software: While many developers contribute to open-source projects, anyone can download and use the software for free. This creates a free rider problem as users benefit from the software without contributing to its development or maintenance.
Group Projects: In academic or professional settings, free riding can occur when individuals in a group project contribute little to no effort but still share in the credit and benefits. This is often referred to as "social loafing."
Labor Unions: If a union negotiates better wages and benefits for workers in a particular industry, those benefits often extend to non-union members as well. This can discourage workers from joining the union, as they can free ride on the union's efforts without paying dues.
Wikipedia: The online encyclopedia relies on contributions from volunteers. However, anyone can access and use the information on Wikipedia for free, creating a free rider dynamic.

The Problem with Free Riding: Under-Provision

The core problem stemming from free riding is the under-provision of goods and services. When individuals can benefit without contributing, there's a reduced incentive for anyone to provide the good or service in the first place. If everyone expects to free ride, the market will fail to supply the optimal amount, or any at all.

Imagine a small town where residents are considering building a community park. If the park is built, everyone in the town will be able to use it. However, building the park requires funding. If residents believe that others will contribute enough to cover the costs, they may be tempted to withhold their own contributions, hoping to enjoy the park for free. If too many people adopt this strategy, the park may never be built.

This under-provision is a market failure because it leads to a situation where society's needs are not being met. The potential benefits of the good or service are greater than the costs of providing it, but the free rider problem prevents the market from reaching the efficient outcome.

Types of Goods and Free Riding

The presence of free rider problems is closely linked to the classification of goods based on their excludability and rivalry:

Private Goods: These are excludable and rivalrous. A hamburger is a private good because you can prevent someone from eating it (excludable) and if you eat it, someone else can't (rivalrous). Private goods are typically provided efficiently by the market because there's a strong incentive for producers to supply them, and consumers are willing to pay for them. Free riding isn't usually a problem with private goods.
Public Goods: These are non-excludable and non-rivalrous. National defense is a classic example. Public goods are highly susceptible to the free rider problem, leading to under-provision by the market.
Club Goods (or Artificially Scarce Goods): These are excludable but non-rivalrous. A subscription to a streaming service is a club good. The provider can prevent you from accessing the service if you don't pay (excludable), but your usage doesn't diminish the availability of the service to other subscribers (non-rivalrous). While non-rivalrous, club goods don't inherently suffer from the free rider problem due to the excludability factor.
Common Resources: These are non-excludable but rivalrous. Fish in the ocean are a common resource. It's difficult to prevent people from fishing (non-excludable), but if one person catches a fish, there's one less fish available for others (rivalrous). Common resources are prone to overuse and depletion, a problem known as the "tragedy of the commons," which is related to, but distinct from, the free rider problem. While not exactly free riding, the tragedy of the commons shares a similar dynamic of individuals benefiting without fully bearing the costs of their actions.

Solutions to the Free Rider Problem

Several mechanisms can be employed to mitigate or overcome the free rider problem:

Government Provision: The most common solution is for the government to provide public goods and finance them through taxation. Because taxes are mandatory, individuals cannot easily free ride on the provision of these goods. Examples include national defense, infrastructure (roads, bridges), and public education.
Private Provision with Exclusion Mechanisms: Sometimes, it's possible to convert a non-excludable good into an excludable one through technological or institutional means. For example, satellite television was initially non-excludable, but the introduction of scrambled signals and subscription fees made it excludable. Similarly, gated communities provide local public goods (security, landscaping) to residents who pay homeowners' association fees.
Subsidies: The government can subsidize the production of goods that have positive externalities (benefits to society beyond the private benefit to the consumer). This encourages firms to produce more of the good, even if individuals can free ride on the benefits.
Regulation: Regulations can mandate certain behaviors that benefit society as a whole, even if individuals would prefer to free ride. For example, mandatory vaccinations protect the entire population from disease, even if some individuals would prefer not to be vaccinated. Environmental regulations, such as emission standards, also help to address free rider problems by forcing firms to internalize the costs of pollution.
Social Norms and Moral Suasion: In some cases, social norms and a sense of community responsibility can encourage individuals to contribute to public goods, even if they could free ride. Charitable giving, volunteering, and participating in community activities are examples of this. Public service announcements and educational campaigns can also promote these norms.
Bundling: Bundling a public good with a private good can sometimes overcome the free rider problem. For example, a business association might provide lobbying services (a public good for its members) but only to members who pay dues (a private good).
Privileged Group: Mancur Olson, in his seminal work The Logic of Collective Action, argued that small, "privileged" groups may be able to overcome the free rider problem. In a small group, each member's contribution makes a significant difference, and the benefits of the public good are concentrated among a few individuals. This creates a stronger incentive for members to contribute, even if others free ride.

The Coase Theorem and Free Riding

The Coase Theorem, which states that private bargaining can lead to efficient outcomes even in the presence of externalities (and, by extension, free rider problems), offers another perspective. However, the Coase Theorem relies on certain assumptions, including:

Clearly Defined Property Rights: It must be clear who has the right to the good or service in question.
Low Transaction Costs: The costs of negotiating and enforcing agreements must be low.
Full Information: All parties must have complete information about the costs and benefits involved.

In reality, these assumptions are often not met, especially when dealing with large groups and complex public goods. Transaction costs can be high, information may be incomplete, and it may be difficult to assign property rights. Therefore, while the Coase Theorem provides a theoretical possibility for overcoming free rider problems through private bargaining, it is often not a practical solution in many real-world situations.

Free Riding and the Digital Age

The digital age has created new challenges and opportunities related to the free rider problem. The internet has made it easier to copy and distribute information goods, such as music, movies, and software, leading to widespread piracy. This is a classic free rider problem, as individuals can enjoy these goods without paying for them.

However, the digital age has also created new ways to address the free rider problem. For example:

Subscription Services: Streaming services like Netflix and Spotify offer a convenient and affordable way for consumers to access a vast library of content. This reduces the incentive to pirate content, as the cost of subscribing is often lower than the hassle of finding and downloading pirated copies.
Freemium Models: Many software companies offer a "freemium" model, where users can access a basic version of the software for free, but must pay for advanced features or support. This allows users to try the software before committing to a purchase, and it provides a revenue stream for the company.
Crowdfunding: Platforms like Kickstarter and GoFundMe allow individuals and organizations to raise funds for projects by soliciting small contributions from a large number of people. This can be an effective way to finance public goods or projects that would otherwise be under-provided due to the free rider problem.
Blockchain Technology: Emerging technologies like blockchain may offer new solutions for addressing the free rider problem by creating decentralized systems for managing digital assets and enforcing property rights.

Criticisms of the Free Rider Concept

While the free rider concept is a valuable tool for understanding market failures, it has also been subject to criticism:

Oversimplification of Human Motivation: Some critics argue that the free rider model assumes that individuals are purely self-interested and rational, and that it ignores other motivations such as altruism, reciprocity, and a sense of community.
Difficulty in Measuring Benefits: It can be difficult to accurately measure the benefits that individuals receive from public goods, making it challenging to determine whether someone is truly free riding.
Potential for "Forced Riders": In some cases, individuals may be forced to contribute to the provision of a public good even if they don't value it. For example, taxpayers may be required to fund a government program that they don't support.
The Role of Social Context: The extent to which free riding occurs can depend on the social context, including cultural norms, levels of trust, and the presence of social sanctions.

Despite these criticisms, the free rider concept remains a valuable framework for analyzing the provision of public goods and understanding the role of government and other institutions in addressing market failures.

Free Riding in Game Theory

The free rider problem is closely related to concepts in game theory, particularly the Prisoner's Dilemma and the Public Goods Game.

Prisoner's Dilemma: In the Prisoner's Dilemma, two individuals are better off cooperating, but each has an incentive to defect (act in their own self-interest), leading to a suboptimal outcome for both. Similarly, in a free rider situation, individuals are better off if everyone contributes to the public good, but each has an incentive to free ride, leading to under-provision.
Public Goods Game: The Public Goods Game is a more direct representation of the free rider problem. In this game, players are given an endowment and can choose how much to contribute to a public good. The total contribution is multiplied by a factor and then divided equally among all players, regardless of their individual contributions. The dominant strategy for each player is to contribute nothing (free ride), leading to a suboptimal outcome where the public good is under-provided.

These game theory models help to illustrate the strategic interactions involved in free rider situations and the challenges of achieving cooperation.

Conclusion

The free rider problem is a fundamental concept in economics that helps to explain why markets often fail to provide public goods and services efficiently. It arises when individuals can benefit from a good or service without contributing to its cost, leading to under-provision. While the free rider problem presents a significant challenge, various solutions, including government provision, private provision with exclusion mechanisms, subsidies, regulation, and social norms, can be employed to mitigate its effects. Understanding the free rider problem is essential for designing effective policies and institutions that promote the provision of public goods and the efficient allocation of resources. As technology evolves and new challenges emerge, the free rider problem will continue to be a relevant and important consideration for economists and policymakers alike.