Free-rider problem

In economics, the free rider problem occurs when those who benefit from resources, goods, or services do not pay for them, which results in an underprovision of those goods or services. 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 among public goods. These are goods that have two characteristics: non-excludability—non-paying consumers cannot be prevented from using it—and non-rivalry—when you consume the good, it does not reduce the amount available to others. The potential for free riding exists when people are asked to voluntarily pay for a public good.

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. In a labor union, free riding occurs if an employee pays no union dues or agency shop fees, but benefits from union representation. One free rides to profit from a stock trade without actually using any of one's own capital. A common example of a free rider problem is defense spending. No one person can be excluded from being defended by a state's military forces, and thus free riders may refuse to pay or avoid paying for being defended, even though they are still as well guarded as those who contribute to the state's efforts.

Free riding is considered an economic problem when it leads to the non-production or under-production of a public good, a situation known as a Pareto inefficiency, or when free riding leads to the excessive use of a common property resource. Providing public goods fairly is difficult because the group leadership does not have the required information. 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 underestimate.

Public goods are characterized by the inability to exclude nonpayers. This problem is 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 money to operate.

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