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What’s it: Free rider is someone who gets benefit from a product at no cost. It appears in the public good because people are free to benefit from the goods without paying. When you consume it, it does not reduce the benefits received by others. Apart from that, you also can’t exclude other people from using it.
Examples of the free rider
You can find many examples of free riders around you, especially for the free stuff for everyone.
Street lights. You and your neighbor spend some money on street lighting. Once installed, these lights are beneficial for local residents. For example, children can play in the evening.
Although it is beneficial for local residents, outsiders who cross the area also get the same benefits even though they do not contribute to buy. Likewise, when your friends visit from out of town, they also benefit from it.
Wikipedia. Millions of people use it, and it’s free. Even if they don’t pay, they can also benefit from the information on the site.
National defense also gave rise to free riders. Whether taxpayers or not, all received the same protection from the police and the army. Of course, when saving you on the road from crime, the police will not ask you whether you paid taxes or not before helping you.
Other examples are:
- Lighthouses – they are useful for local seafarers and ships. Likewise, ships from other regions or countries also benefit, although they do not contribute to maintenance costs.
- Fireworks – goers, whether they pay to join the festival or not, can enjoy the same entertainment.
- Public parks – they are financed by public money (tax) to pay wages for cleaning workers, gardening, land acquisition, and so on. And, everyone can access it, regardless of whether they pay taxes or not.
Free rider in public goods
Free riders often appear for public goods—two reasons why public goods give rise to free riders.
- Consumption by one party does not reduce their availability for the other party.
- Individuals cannot exclude other parties from consuming or using public goods.
For these two reasons, property rights cannot be clearly defined and enforced. Individuals can take advantage of public goods without paying for them.
Some people are trying to get a free ride behind other people buying public goods. Both those payers and nonpayers, all can benefit from it. Ultimately, it generates a little incentive for people to contribute to providing it.
Free rider impacts
The free rider problem is an example of a market failure for public goods. People benefit from resources, goods, or services, even if they don’t pay for them. That raises a few problems.
First, the consumption of goods has become very excessive. People can use and get the same benefits from the consumption of goods. They will act to maximize their own utility leading to excessive consumption.
Second, goods or resources are not economically feasible to produce. Businesses don’t want to provide public goods because they are unprofitable. They don’t earn enough revenue to cover production costs. The more people who use it for free, the smaller the revenue. For this reason, producers have no incentive to provide them.
For this reason, the government takes part in providing public goods. Even though it is not economically profitable, public goods positively benefit society (positive externalities). To finance its provision, the government collects taxes.
Possible solutions for free riders
There are several solutions to solve the free rider problem. In the street lighting above, residents can ask for donations for motorists passing through the area. That reduces the burden for repairs at a later date or to reimburse a portion of residents’ contributions.
Collect taxes. Governments can collect taxes and use them to provide public services. For example, by requiring everyone to pay taxes, the government could finance national defense. And, if everyone paid taxes, there would be no free riders.
Excluding nonpayers. We can prevent nonpayers from using the product. In other words, we turn public goods into club goods. The cinema is a good example of this. You can’t prevent other people from watching new movies, but you have to pay and other people for that.
Another example is highway. When the road is congested, we can turn it into a toll road and only allow those who pay.
Likewise, with museums. If previously it was free for everyone, then the owner can charge an entrance fee.
User contributions. Suppliers provide a common platform where users (beneficiaries) contribute to each other to develop the platform. Wikipedia is an example. The owner provides a platform where everyone can write new articles on the page, and other visitors can read it. Surely, it reduces the costs of providing the platform.
