Free Rider Problem

Free Rider Problem Examples

What are examples of the free rider problem?

We will take a look at two examples of the free rider problem here:

• public library;
• donations.

Free rider problem examples: Public Library

Let's imagine that there's a public library in your neighborhood that everyone loves — it's always well-cleaned and organized. This library is run on local taxes from those that live in the neighborhood. The problem? Recently, people who do not live in the neighborhood have been coming from out of town to use the library. While not a problem in and of itself, these people are outnumbering the locals and not allowing them to use it! The locals are upset because of how crowded the library is getting from people who don't pay for it.

The free riders here are the people who come from out of town and are using the public good. They are using a service that they are not paying for and ruining it for those that are paying for it. This is an example of the free rider problem.

Free rider problem examples: Donations

Let's imagine that your favorite grocery store is run completely on donations — quite an altruistic town! It is an untold rule that everyone who shops there must donate some amount to the grocery store for their excellent service. In fact, their service is so good that they have been recognized in the local newspaper on several occurrences. This sounds like a great, functional system that this grocery store has set up! However, there is one problem that is ruining the store: the free rider problem.

Word got around that some people were not making donations to the grocery store like they used to. Not only that, but the free riders are starting to outnumber the ones that are donating to the grocery store. Of course, this makes the majority who are making donations upset. Rightfully so, why should they bear the burden while others pay nothing and reap the rewards? This incentivizes those that are making donations to stop since they feel it is unfair. Due to the lack of donations, the grocery store will eventually shut down.

What happened here? Free riders used a good that they were not paying for. Of course, they were paying for the groceries themselves. However, they were not donating to keep the grocery store up and running. Once people found out, they started to do the same until the grocery store was no longer able to stay open.

Free Rider Problem Government

How does the free rider problem relate to the government? First, we must recognize what the government provides that is susceptible to the free rider problem. The goods and services need to be non-rivalrous and non-excludable.

Non-rivalrous goods are goods that someone can use without preventing someone else from using the same good. Non-excludable goods are goods that are available to everyone. Together, non-rivalrous goods and non-excludable goods are public goods.

The government provides public goods because the private sector could not provide such goods without a market failure. This is because there is a very low demand for public goods — there is minimal profitability for private firms. Therefore, the government provides most public goods since it does not have to worry about profit.

Now that we understand what government goods are susceptible to the free rider problem, we can see how free riders utilize these goods.

As we can see, when people visit from other countries and use public roads, they are considered free riders. This can apply to any government good or service that is non-excludable and non-rivalrous.

Fig. 1 - Public Road

Free Rider Problem vs. Tragedy of the Commons

Free rider problem vs. tragedy of the commons: what are the differences? Recall that the free rider problem occurs when people use a good that they are not paying for themselves. The tragedy of the commons occurs when a good is overused and degraded in quality. The tragedy of the commons occurs for goods that are non-excludable but rivalrous.

The tragedy of the commons involves a good that anyone can use (non-excludable) and will degrade in quality by overusing it (rivalrous). The free rider problem only involves people using a good that anyone can use and that they are not paying for. The main difference between the tragedy of the commons and the free rider problem is that the tragedy of the commons will have people using a good too much to the point it degrades in quality for others, while the free rider problem only involves using a good that is not paid for by the user.

Free Rider Problem Solutions

Let's discuss some potential solutions to the free rider problem. Recall that the free rider problem occurs when people benefit from a good or service that they are not paying for. One quick solution is to privatize the good that is being overused by the public.

A quick solution, but it does leave out those that were using the park responsibly that may not be able to pay the fee of a privatized good.

In addition to privatizing a public good, the government can step in when a good is being overused to ameliorate the issue.

This is another example of fixing the free rider problem. However, government regulation can be difficult to get right when it comes to a public good. What is the "right" quota that the government should implement? How will the government enforce the regulation? How will the regulation be monitored? These are all important questions when it comes to solving the free rider problem.

Free Rider Problem Graph

What does a free rider problem graph look like? We can view a free rider problem on a graph based on the willingness to pay for a public good depending on individual income.

Fig. 2 - Free Rider Public Good Graph¹

What does the graph above show? The x-axis shows pollution, and the y-axis shows the willingness to pay. Therefore, the graph shows the relationship between pollution and willingness to pay for different income levels. As we can see, the more someone earns, the more they are willing to pay to decrease pollution. In contrast, the less someone earns, the less they are willing to pay to decrease pollution. This is insightful because it shows that if people were to pay for clean air, some would pay more than others, yet everyone would benefit the same since clean air is non-excludable and non-rivalrous. Therefore, it would result in a market failure if the government did not provide clean air as a public good.