Free Rider Problem – Definition

Cite this article as:"Free Rider Problem – Definition," in The Business Professor, updated September 17, 2019, last accessed May 26, 2020, https://thebusinessprofessor.com/lesson/free-rider-problem-definition/.

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Free Rider Problem Definition

The free rider problem refers to a case where a few individuals tend to utilize beyond their fair share or pay less than the standard cost of a shared product or service. This situation is treated as market failure that takes place when people exploit the scenario of utilizing a common resource without having to pay for it. For example, residents of a nation using public services without incurring any tax expenses related to them. The issue of free rider occurs in a market where there is no distinction made in the supply of product being consumed, followed by no restrictions made on consumption. Free riding enables citizens to use products and services like metropolitan police presence, sanitation infrastructure, clean water provision, library and public broadcasting services, etc.

A Little More on What is a Free Rider Problem

Free riding problem occurs when there is an exploitation of natural resources by people to such an extent that could result in zero supply of a product, in case lots of individuals want to consume it. There are some individuals who believe that a free ride refers to a little benefit to spend money or time for producing a collective product, at the time they reap its advantages even if they don’t spend anything.

How does the free rider problem occur?

There are two reasons that cause free rider problem. The first reason includes non-excludability which signifies that when a specific product is designed for everyone’s use, there is no chance of restricting people to stop using it. The next reason is if the supply doesn’t get affected from continuous consumption, people would continue using it.

Since, the free rider problem is related to the public goods, it becomes the responsibility of government to make regulations and policies for preventing individuals from doing this over-exploitation of resources. The Internal Revenue System in the United States is responsible for accumulating taxes and formulating tax laws. If a person tends to avoid taxes, he or she suffers a penalty of $250,000, and a maximum of 5-year imprisonment. Corporations need to pay the double, that is $500,000 in case they don’t pay taxes on time.

A workplace, being partially unionized, can also cause free riding problem as the personnel of the firm would have an increase in wages and feasible working conditions, irrespective of if they are a part of the union or not.

Behavioral tendencies and tragedy of the commons

Free riding exhibits a behavioral approach that involves the potential to avoid work that has least effects, or the related consequences are not that huge and spontaneous in nature. William F. Lloyd in 1833 introduced this behavioral approach that was further developed by Garrett Hardin in 1968 as the Tragedy of the Commons where personal motives are prioritized over the social welfare. The real-life example related to the Tragedy of the Commons is when overgrazing of a large grass acre is done to the extent that makes the land unproductive. During the 1960s, Cod fisheries of Newfoundland faced the Tragedy of the Commons when exclusive industrial technologies made fishermen catch more fish, that consequently led to the collapse of the industry that prolonged for over a century.

Are there any solutions to free riding?

In order to control the problem of free riding, it is important for the government to initiate and bring revolution. There are some governments that regulate products and services so as to fix this problem. Also, they can ask people for paying taxes on their consumption so as to reduce their utilization. They can also convert the status of public goods into private so as to ensure that people know that they need to make payments on their part. Free riders can  also be dealt by seeking donations or charities in museums. It can be possible that people won’t give a second thought for paying a little donation for consuming a product or service.

References for “Free Rider Problem”

https://www.investopedia.com › Insights › Markets & Economy

https://en.wikipedia.org/wiki/Free-rider_problem

https://corporatefinanceinstitute.com › Resources › Knowledge › Economics

https://www.economicshelp.org › Economics help blog › Glossary Terms

https://www.intelligenteconomist.com/free-rider-problem/

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