Free Rider Problem

Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Free Rider Problem?

The free rider problem is caused by individuals who do not pay for what they consume. It is a scenario where a multitude consumes resources or benefits, but only a small section of the population pays for it. When this occurs, there is an overconsumption of resources.

Free Rider Problem

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When there are too many free riders in an economy, there is an overuse of available resources, facilities, and benefits. But, when it comes to paying for the service and maintenance, there are very few takers. Free riders become a menace when the population is large; resources are not shared equally.  

Key Takeaways

  • The free rider problem definition suggests the inefficient distribution of resources; an opportunistic section of society consumes in excess but never pays a dime.
  • The free rider issue is common irrespective of the economy’s nature, size, and location. It is also referred to as the tragedy of the commons.
  • Many economists blame the free-market system for it.
  • Privatization of public goods and services can be a potential solution. It will limit the number of consumers. Privatized goods are made exclusive to a section of the population willing to pay for them.

Free Rider Problem Explained

Free rider problem in economics highlights customers who consume without paying for a resource. Often free riders exhaust available resources, and people in actual need have to wait. This problem is caused by the ineffective distribution of goods and services.

It is quite obvious that the cost of resources is not getting fulfilled due to a lack of contribution. When profits are not generated, it becomes a serious issue for the manufacturers. Some economists claim that the failure of the conventional market system has created free riders. Yes, it is unfair and unethical, but free riders are only taking advantage of available opportunities.

If a company witnesses too many free riders and fails to accumulate visible profits, it has to shut down the production of goods or services. When this occurs, the burden of providing for the citizens (including free riders) falls on the government. Because, as taxpayers, citizens expect the government to chip in when there is no private service provider or manufacturer in a particular segment.

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When Does It Occur?

The free rider issue is witnessed in the following scenarios:

  • Whenever there is an unequal or unmanaged distribution of goods and resources, free riders take advantage.
  • Supply gets exhausted when there is an enormous amount of consumption by people with no check on how many times a person is consuming the resource.
  • Free riders become a burden on an economy because of their inability to contribute. They are unable to pay for their share of expenses and consumption. Even if they do try, it only covers a part of the cost.
  • These issues arise when there are no checks or control on the consumption of goods and services.
  • Free riders become a menace when producers of goods and services cannot make any profit or create value. If there are enough paying customers, they offset losses caused by free riders.
  • The free rider issue suggests that the system has failed. Companies do not like being part of a failing system. They cut their losses, shut down production, or relocate to regions where the system functions efficiently.
  • Free riding becomes a bigger issue when a single authority or person is put in charge of production and maintenance. Such entities do not have the manpower to control or check goods consumption.

Example

Now, let us look at a free rider problem example to understand it better.

Carol has a steady job and many friends. She lives in an apartment with two friends—Jessica and Rachel. All three girls make a comfortable living. Even then, Jessica and Rachel end up paying for everything—apartment rent, utilities, and maintenance. Carol never contributes towards anything.

Rachel and Jessica not only pay for Carol’s Wi-Fi, online services, and subscriptions but also cover her tab for food whenever they go out. Be it a party, celebration, groceries, shoes, clothes, or accessories, Jessica and Rachel always share the expenses. But Carol’s contribution is negligible or none at all.

Carol is a stereotypical example of the free-ride problem. At the end of every month, Rachel and Jessica suffer a cash crunch due to Carol’s overconsumption and lack of contribution.

Solutions

The free rider problem solutions to the free rider issue are as follows:

  • The government can design systems that keep checking the distribution of resources and public goods. In addition, this system should be monitored constantly.
  • Creating awareness can help. When it comes to free riders, the intent is a big factor. Some become free riders because they cannot afford what they consume. Others simply choose not to pay, despite being financially capable. Either way, citizens must be aware of their responsibilities toward public interests.
  • Privatization of public goods and services will limit the number of consumers. Privatized goods are made exclusive to a section of the population willing to pay for them.
  • Perhaps the best solution to the free rider issue is recognizing and rewarding those that actually pay for what they consume. Citizens can be given positive reinforcement for paying instead of avoiding payments. And the rewards need not have a monetary value attached to them.

Frequently Asked Questions (FAQs)

1. What does the free rider problem lead to?

The free rider issue causes the inefficient distribution of goods and resources and overconsumption of commodities. Ultimately resources are exhausted. It fails to reach the needy. More importantly, free riders become a massive burden on the small group of people who actually pay an amount.  

2. How does technology affect free riders?

As technology evolves, the system becomes more and more complex. Opportunists find it harder to find loopholes in a complex system. Modern technology easily isolates free riders within a population. Based on new technology, new systems are formulated, forcing everyone to pay for what they consume.

3. Why is national defense an example of the free rider issue?

National defense is a classic example of the free rider issue. All citizens benefit from international security, but not only a few contribute to it. People always anticipate that someone else will pay and plan on riding for free. Not every family is sending a member into the military or defense forces. Even then, the government prioritizes national defense and bears the expenses (irrespective of how many pay taxes).

This article has been a guide to What is Free Rider Problem & its definition. We explain when it occurs, its solutions, & an example. You can learn more about it from the following articles –

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