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Free-rider problem

In economics, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods and common pool resources do not pay for them[1] or under-pay. Examples of such goods are public roads or public libraries or services or other goods of a communal nature. Free riders are a problem for common pool resources because they may overuse it by not paying for the good (either directly through fees or tolls or indirectly through taxes). Consequently, the common pool resource may be under-produced, overused, or degraded.[2] Additionally, it has been shown that despite evidence that people tend to be cooperative by nature (a prosocial behaviour), the presence of free-riders causes cooperation to deteriorate, perpetuating the free-rider problem.[3]

This article is about an economic and political phenomenon. For the stock market term, see Free riding (stock market). For free rides on freight trains, see Freighthopping. For free rides on any type of vehicle, see Stowaway.

The free-rider problem in social science is the question of how to limit free riding and its negative effects in these situations. Such an example is the free-rider problem of when property rights are not clearly defined and imposed.[4] The free-rider problem is common with public goods which are non-excludable and non-rivalrous. Non-excludable means that non-payers cannot be stopped from getting use of or benefits from the good. Non-rival consumption stipulates that the use of a good or service by one consumer does not reduce its availability for another consumer. These characteristics of a public good result in there being little incentive for consumers to contribute to a collective resource as they enjoy its benefits.


A free rider may enjoy a non-excludable and non-rivalrous good such as a government-provided road system without contributing to paying for it. Another example is if a coastal town builds a lighthouse, ships from many regions and countries will benefit from it, even though they are not contributing to its costs, and are thus "free riding" on the navigation aid. A third example of non-excludable and non-rivalrous consumption would be a crowd watching fireworks. The number of viewers, whether they paid for the entertainment or not, does not diminish the fireworks as a resource. In each of these examples, the cost of excluding non-payers would be prohibitive, while the collective consumption of the resource does not decrease how much is available.


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, political science, and vaccines.[5][6] 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.[7]


The economic free-rider problem is equally pertinent within the realm of global politics, often presenting challenges in international cooperation and collective action. In global politics, states are confronted with scenarios where certain actors reap the benefits of collective goods or actions without bearing the costs or contributing to the efforts required to achieve these shared objectives. This phenomenon creates imbalances and hampers cooperative endeavors, particularly in addressing transnational challenges like climate change, global security, or humanitarian crises. For instance, in discussions on climate change mitigation, countries with lesser contributions to greenhouse gas emissions might still benefit from global efforts to reduce emissions, enjoying a stable climate without proportionally shouldering the costs of emission reductions. This creates a disparity between states' contributions and their gains, leading to challenges in negotiating and implementing effective international agreements.The economic free-rider problem's manifestation in global politics underscores the complexities and obstacles encountered in fostering collective action and equitable burden-sharing among nations to address pressing global issues.[8]

Incentive[edit]

The underlying incentive which generates the free-rider problem can be explained via the application of the Prisoner's dilemma,[9] within the context of contributing to a public good. Suppose two people were to split a contribution to a public service (such as for a police station) with society benefiting from their contribution. According to the Prisoner's dilemma, certain conclusions can be drawn from the results of this scenario. If both parties donate, they are out of pocket and society benefits. If one party doesn't pay (in the hopes that someone else will) they become a free-rider, and the other will have to cover the cost. If the other party also decides to become a free-rider and neither pay, then society receives no benefit. This demonstrates that the free-rider problem is generated by individuals' willingness to let others pay when they themselves can receive the benefit at zero cost.[10] This is reinforced by the economic theory of rational choice, stating that humans make choices which provide them with the greatest benefit. Therefore, if a service or resource is offered for free, then a consumer will not pay for it.[11]

Economic issues[edit]

Free riding is a problem of economic inefficiency when it leads to the underproduction or overconsumption of a good. For example, 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 under-report their valuations.[12] Goods that are subject to free riding are usually characterized by: the inability to exclude non-payers, its consumption by an individual does not impact the availability for others and that the resource in question must be produced and/or maintained. Indeed, if non-payers can be excluded by some mechanism, the good may be transformed into a club good (e.g. if an overused, congested public road is converted to a toll road, or if a free public museum turns into a private, admission fee-charging museum).


Free riders become a problem when non-excludable goods are also rivalrous. These goods, categorized as common-pool resources, are characterized by overconsumption when common property regimes are not implemented.[13] Not only can consumers of common-property goods benefit without payment, but consumption by one imposes an opportunity cost on others. The theory of 'Tragedy of the commons' highlights this, in which each consumer acts to maximize their own utility and thereby relies on others to cut back their own consumption. This will lead to overconsumption and even possibly exhaustion or destruction of the good. If too many people start to free ride, a system or service will eventually not have enough resources to operate. Free-riding is experienced when the production of goods does not consider the external costs, particularly the use of ecosystem services.


An example of this is global climate change initiatives. As climate change is a global issue and there is no global regime to manage the climate, the benefits of reduced emissions in one country will extend beyond their own countries' borders and impact countries worldwide. However, this has resulted in some countries acting in their own self-interest, limiting their own efforts and free-riding on the work of others. In some countries, citizens and governments do not wish to contribute to the associated effort and costs of mitigation, as they are able to free-ride on the efforts of others. This free rider problem also raises questions in regards to the fairness and ethicalness of these practices, as countries most likely to suffer the consequences of climate change, are also those who typically emit the least greenhouse gases and have fewer economic resources to contribute to the efforts, such as the small island country of Tuvalu.[14]


Theodore Groves and John Ledyard believe that Pareto-optimal allocation of resources in relation to public goods is not compatible with the fundamental incentives belonging to individuals.[15] Therefore, the free-rider problem, according to most scholars, is expected to be an ongoing public issue. For example, Albert O. Hirschman believed that the free-rider problem is a cyclical one for capitalist economies. Hirschman considers the free-rider problem to be related to the shifting interests of people. When stress levels rise on individuals in the workplace and many fear losing their employment, they devote less of their human capital to the public sphere. When public needs then increase, disenchanted consumers become more interested in collective action projects. This leads individuals to organize themselves in various groups and the results are attempts to solve public problems. In effect this reverses the momentum of free riding. Activities often seen as costs in models focused on self-interest are instead seen as benefits for the individuals who were previously dissatisfied consumers seeking their private interests.


This cycle will reset itself because as individuals' work for public benefit becomes less praiseworthy, supporters' level of commitment to collective action projects will decrease. With the decrease in support, many will return to private interests, which with time resets the cycle. Supporters of Hirschman's model insist that the important factor in motivating people is that they are compelled by a leader's call to altruism. In John F. Kennedy's inaugural address he implored the American people to "ask not what your country can do for you; ask what you can do for your country." Some economists (for example, Milton Friedman) find these calls to altruism to be nonsensical. Scholars like Friedman do not think the free-rider problem is part of an unchangeable virtuous or vicious circle, but instead seek possible solutions or attempts at improvement elsewhere.[16]

Altruistic solutions[edit]

Social norms[edit]

Psychologically, humans are fundamentally considered as free-riders by others only when benefits are consumed while contributions are withheld. Indicating that in all cultures free-riders are recognised, however, cultural differences exist in the degree of tolerance and how these people dealt with them.[28] The impact of social norms on the free-rider problem differs between cultural contexts, which may lead to a variance between results in research on the free-rider problem when applied cross-culturally. Social norms impact on privately and voluntarily provided public goods; however, is considered to have some level of effect on the problem in many contexts. Social sanctioning, for example, is a norm in and of itself that has a high degree of universality.[29] The goal of much research on the topic of social sanctioning and its effect on the free-rider problem is to explain the altruistic motivation that is observed in various societies.


Free riding is often thought of only in terms of positive and negative externalities felt by the public. The impact of social norms on actions and motivations related to altruism are often underestimated in economic solutions and the models from which they are derived.[30]

Altruistic social sanctions[edit]

While non-altruistic social sanctions occur when people establish common property regimes, people sometimes punish free-riders even without being rewarded. The exact nature of motivation remains to be explored.[31] Whether costly punishment can explain cooperation is disputed.[32] Recent research finds that costly punishment is less effective in real world environments.


Other research finds that social sanctions cannot be generalized as strategic in the context of public goods. Preferences between secret sanctions (untraceable sanctions between players in the game) and standard sanctions (traceable sanctions including feedback between players in an otherwise identical environment) on free riders did not vary significantly. Rather some individuals preferred to sanction others regardless of secrecy.[33] Other research build on the findings of behavioral economics, finds that in a dilemmatic donation game, donators are motivated by the fear of loss. In the game donators' deposits were only refunded if the donators always punish free riding and non-commitment among other individuals. Pool-punishment (everyone loses their deposit if one donator doesn't punish the free rider) provided more stable results than punishment without consideration of the consensus of the group. Individual-to-individual peer punishment led to less consistently applied social sanctions.[34] Collectively this research, although it is experimental in nature, may prove useful when applied in public policy decisions seeking to improve free-rider problems within society.

Cornes, Richard; Sandler, Todd (1986). The Theory of Externalities, Public Goods and Club Goods. New York: Cambridge University Press.  052130184X.

ISBN

"A New Solution: the Climate Club" (a review of Gernot Wagner and Martin L. Weitzman, Climate Shock: The Economic Consequences of a Hotter Planet, Princeton University Press, 250 pp, $27.95), The New York Review of Books, vol. LXII, no. 10 (June 4, 2015), pp. 36–39.

William D. Nordhaus

Venugopal, Joshi (2005). "Drug imports: the free-rider paradox". Express Pharma Pulse. 11 (9): 8.

P. Oliver – published by Social Science Computing Cooperative University of Wisconsin

Sociology 626