Understanding the Free Rider Problem

Understanding the Free Rider Problem Have you ever been in a situation where you have felt like you pull more than your weight in a project, at work, in your neighborhood or even in your own home?Have you somehow ended up doing (almost) everything while others are slacking off?Imagine this: you are preparing a meal for your family. Everybody is eating the delicious dinner that you made, bought ingredients for, set up the table, and did all the dishes. Everybody enjoys it, but they did nothing to contribute to the experience.Or this other, very well-known scenario to even younger children: There are five of your classmates in your assignment group. You and Tom research and gather information; Kate ends up typing the entire project, but what about Bill and Jane? Jane makes a suggestion every now and then, and Bill says that this assignment is well beyond his knowledge and/or interests, and decides to stay on the sidelines and not help at all.Now, at the end of the day, all five of you get an A from your teacher, regardles s of how much you contributed to the overall success of the project.Do you feel okay about this? How do Bill and Jane feel? Would you do it again in the same way? Would you do it at all or would you take note from Bills handbook?What these examples illustrate is the instinct of all the people, in general, to get as much as they can out of a certain situation with investing as little resources (energy, time, money, and so on) as possible.In the Social and Economic science, it is called the Free Rider Problem.WHO IS A FREE RIDER, AND WHAT IS THE FREE RIDER PROBLEM?A free rider is a person who uses a certain good, resource or service without actually paying for it, or if they are contributing in some way, they are not contributing enough.This leads to the overconsumption or underproduction of that good, which eventually leads to either partial or complete market failure. From our example, we can deduce that both Bill-who does not contribute to the project, and Jane-who contributes rath er insufficiently are free riders in this scenario. The other three Tom, Kate, and you are contributing to the project.On a more global scale, the contribution can be made in several ways, depending on the type of a good or a service that is in question.If you are thinking about services like free healthcare- you can either contribute by paying taxes, donating money or even time, by volunteering, for example. In other cases, such as national defense, all you can do is pay the allocated taxes.The free rider problem happens mostly with public goods like national defense, access to clean air and water, flood protection, free knowledge (public schools, libraries, and online educational content), roads, bridges, sanitation regulations and so on.The problem with Public goods is that they are non-excludable and non-rival. What does that mean?A good is non-excludable if people who do not pay for it cannot be easily prevented from using that particular good.Lets take a look at an example: C lothes are an example of excludable goods because it is easy to prevent people who do not pay for clothes from using them (note: think about purchasing clothes, not donations for the underprivileged).However, national defense is a non-excludable good, since it is hard, no, not hard- it is impossible to prevent people who did not pay taxes for national defense from benefiting from it.They are protected the same way as those members of the society who do pay for national defense.A service or a good is non-rival if when one persons use of the goods does not reduce the ability of another person to use the good.Clothes are a rival good since if one person is using them; another person cannot use those same clothes at the same time.On the other hand, if a person is protected by national defense from, lets say, bombing; that does not prevent other people, even those who do not pay, to benefit from the protection.And, additionally, the people who do pay for it do not get the extra protectio n just because they have paid.Since it is really hard to exclude the non-payers, there is an incentive not to pay and try to free ride.Rational individuals would never want to contribute to the allocation of public goods because a rational individual knows that as soon as they make a payment for it, other people are going to benefit from it.So, then they are thinking: Why should I do that? Surely I would have to let other people pay for it and then I free ride on somebody elses payment.But if everyone decides not to pay and free ride, the public good does not get provided as there are not enough funds to sustain the market.The final consequence in the example of national defense is that there is none and that in the unfortunate case of a war, the country will not have the resources to defend itself and all of its people, regardless of whether they paid for it or not.Because of that, there is a missing market for public goods; private companies do not want to produce them as there is no profit to it.Take street lights, or lighthouses, or bridges, for example, although they are socially desirable by all, they are not provided for willingly. So, who pays for those? Well, the government does.It is interesting to note that the free rider problem occurs as an issue of the mixed economic system (free market economy combined with command economy), which is the newest and most common in this day and age.WHY DO PEOPLE CHOOSE TO FREE RIDE? As we already mentioned and illustrated in the above examples, it seems nonsensical for the people to pay for something if others are going to use it for free.Why would they pay for it if they think that they can benefit from it anyway-somebody else will make that contribution?There are two illustrations that can further explain the free rider problem and the sociological or rather behavioral aspect of it, and those are The Tragedy of the Commons and the Prisoners Dilemma Game.I.  Free Rider Problem and the Tragedy of the Commons With all of our examples, if you decide not to contribute to the public good, you are expressing the innate tendency to reap as many benefits as possible with as little work possible.In such cases, the benefits are larger for you in the short term; however, the consequences for society are far greater in the long term.Those actions are selfish, but people are wired this way- to take care of themselves and disregard the wellbeing of others, and themselves as a part of society as the end result.This is illustrated in grabbing more than your share of resources that should be equally used by all and equally distributed among all the members of the society.“What is common to the greatest number gets the least amount of care.”   Aristotle, PoliticsThe incentive to do what is best for you rather than what is best for everyone is the root cause of something that economists call the Tragedy of the Commons.This term is used to illustrate economic and social situations in which every person has the same access to the same good as any other individual- like street lighting, or a public park, for example.The idea in this theory is that those common goods that everyone has access to are often misused or exploited.It explains most of our environmental problems like air pollution, deforestation, the killing of many endangered species, and overfishing.The term was coined way back in 1833 by William Forster Lloyd, a British economist, who wrote a pamphlet on a hypothetical situation of the British farmers over-consuming the grazing areas by letting more than the allocated number of cows feed on the areas.As a result, the individual benefits were greater in the short term, but the grazing area was eventually destroyed.Garrett Hardin, an ecologist, popularized the term more than a century later by raising attention to overusing natural resources that can cause issues that could be catastrophic in the long run, arguing for the importance of the public good rather than individuals a lone.In many places in the world, there are more fish being pulled out of rivers, lakes, and oceans than the fish that are being born.Now, this is not just bad for the fish, and the entire ecosystem that will suffer if an entire species would be removed from it, but for the fishermen as well. As the resources are depleted, fishermen find themselves without the job.Isnt it more beneficial for more of them to work for a little less profit, but keep their jobs for the rest of their working lives, rather than have larger profit for a short period of time?So why are they not conserving, allowing fish to reproduce and generate more resources for the future?Take a look at the incentives. If a few environmentally conscious fishermen decide to give the fish the time to spawn, then some other fisherman will harvest them instead. If you cannot prevent other people from exploiting the resource, then you have an incentive to exploit it yourself and take as much as you can and as quickly as you c an. But with everyone following that logic, the finite resource gets pillaged.There is an entire subfield of economics that is focused on addressing and solving issues like this, and it is called environmental economics.However, the principles of the Tragedy of the Commons can be successfully used to illustrate the social causes and motivation for free riding.When we take street lightning into consideration, the consequences are not as far-reaching as with destroying entire ecosystems, but lets explain how the Tragedy of Commons applies to this problem.If you pay for the street light you are safe to wonder about your neighborhood at night, knowing that you will be less likely to stumble and fall. But so will your neighbor who did not pay for the street light.If you decide not to pay, and your neighbor still does not pay, you will both have a larger chance of injuring yourselves; it will be harder to notice a potential robber, you will be stressed and potentially develop a health co ndition related to stress.This is just a hypothetical and highly unlikely situation.However, stop and think for a moment how much you would hurt yourself, the others and all future generations by being socially and economically unconscious and selfish, especially when you decide to free ride on issues that are beneficial to all members of society.II.  The Free Rider Problem and the Prisoners Dilemma GameThe Prisoners Dilemma Game is a part of game theory (studies how mathematical models can show the process of rational decision-making).The idea came from Flood and Dresher in 195o and was named and shaped up to what it is today by A.W. Tucker.The main idea behind the game is to show that, given a choice to either cooperate or not cooperate, the majority of rational people opt not to cooperate regardless of how this might not be in their best interest. The original prisoners dilemma game includes two people with a rather short possible sentence with the option to lower the sentence ti me if they cooperate and betray another.If one betrays and the other one does not, the one who betrayed goes free and the other one gets a bigger sentence.So, why does it then happen that in most cases, both prisoners decide not to betray?The dilemma occurs because, from a personal standpoint, it is clear that they can only gain if they are betraying the other, regardless of the fact that the mutual benefit is larger if they both cooperate.This comes as a result of not knowing what the other prisoner would do, and having no control over it.So how does this apply to the free rider problem?We stated that the free rider problem occurs that the public goods, resources or services are divided equally among all the members of the society regardless of how much, or even whether the members of the society pay/contribute to the use of a certain public good.Let us imagine the next scenario:There are two people- Jake and Kim who are thinking about paying for public service. Lets say that the l ocal community has decided to open up a new library, and each of the members of the community is asked to contribute by paying 6$ to help build the library which will be available for everyone to use.The government has taken into account how much money people spend on buying books on average and came to the conclusion that the benefit of a 6$ contribution will be 10$.This is great since the benefit is larger than the cost. How does it happen that each member of the community is motivated to free ride rather than pay the 6$ and enjoy the new library?Let us examine how Jake and Kim rationalize the free riding on this occasion.If both Jake and Kim pay the required amount of money, they will each gain 10$, and the individual net gain is $4, and the complete gain for the society is 20$.If Jake contributes and Kim does not, the total gain is only 10$, and since the public goods are distributed evenly, Kim will get her 5$ in net gain with no contribution whatsoever, while Jake will have th e -1$ net gain since he paid the 6$ cost and gained only 5$. The same process goes for the situation that Kim contributes and Jake does not.If both Jake and Kim decide not to contribute there will be no cost but subsequently no gain either.This is where rationalizing and the incentive to free ride comes to action.Since Jake does not know for sure if Kim will contribute, he is worried that only he would pay for the library which would be available for Kim to use as well, he will lose 1$, and she will gain 5$.Kim is thinking n the same way. Since we assumed that both of them are rational people, they will most surely decide not to contribute at all as it will diminish their chance at a loss, regardless of the benefit they would have if they actually do contribute to the building of the library.If the majority of the people in this hypothetic community thought in this way, there would be insufficient or no funds at all for the government to build the public library so the community wil l be left without one, and possibly spend more money on buying books in the long run, than if they did contribute without thinking about their individual needs that are more beneficial, short term.ARE THERE SOLUTIONS TO THE FREE RIDER PROBLEM?Since most of the public goods are government funded, it is up to the government to find a way to eliminate the free riders.There are several ways in which the government can do that.1. TaxationIf the government finds that the fire department in your community costs X amount of dollars, they should divide the cost to the entire number of the contributing individuals and require them to pay the taxes.In that case, the fire department will be sustained, and everybody will be able to use this public service in the time of need. Since the taxes are mandatory, the free rider problem is eliminated.Both the cost and the benefits are evenly shared among all the members of the community.Sometimes, the need for taxation feels like a punishment to people who initially did not want to pay for a certain good, but it seems like the only certain way to fix the free-riding problem.Again, people are acting on their best individual interest by paying what is required of them and not risking the additional fees if they do not.2. PrivatizationIf a government makes a public good a private one, it addresses the problem of non-excludability.If they put a toll on a bridge, you have to pay to use it, so some funds for more bridges and roads, and repair of the existed ones come through that money. If you do not want to pay the toll, you will have to find another way to travel where you need to.3. DonationsFor public goods that are not as expensive as sanitation infrastructure, roads or national defense and healthcare, soliciting donations may be the way to make up for the free riders.The act of donating small amounts of money to public parks, libraries or museums will not completely eliminate free riders, but it appeals to peoples altruism and mor ale.Those donations can be used books, clothes, canned goods and so on, not just money.FINAL WORDThe free rider problem occurs as a consequence of peoples inherent need to work/pay as little as possible and gain as much as possible.We will always look for what is best for us at the moment, rather than looking at a bigger picture and doing something beneficial for the community whether it be a local animal shelter, a states defense system, or worlds environmental problems.What we should get from this text is that it is in our nature to look for an easy way out and rationalize when we are tempted to free ride, however, it is better to focus on the long term well-being of our entire community, since it is an investment in the future of this world and the generations that are to come.It is up to us to become more socially, economically, and environmentally conscious, and evade our impulse to free ride, and it is up to the government to implement means that will ensure the well-being of all.