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In the social sciences, the free-rider problem is a type of
market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where ...
that occurs when those who benefit from resources,
public good Public good may refer to: * Public good (economics), an economic good that is both non-excludable and non-rivalrous * The common good, outcomes that are beneficial for all or most members of a community See also * Digital public goods Digital pu ...
s (such as public roads or public library), or services of a communal nature do not pay for them or under-pay. Free riders are a problem because while not paying for the good (either directly through fees or tolls or indirectly through taxes), they may continue to access or consume it. Thus, the good may be under-produced, overused or degraded. Additionally, it has been shown that despite evidence that people tend to be cooperative by nature, the presence of free-riders cause this prosocial behaviour to deteriorate, perpetuating the free-rider problem. 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 right The right to property, or the right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically ...
s are not clearly defined and imposed. 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 Collective bargaining is a process of negotiation between employers and a group of employees aimed at agreements to regulate working salaries, working conditions, benefits, and other aspects of workers' compensation and rights for workers. The ...
, antitrust law, psychology,
political science Political science is the scientific study of politics. It is a social science dealing with systems of governance and power, and the analysis of political activities, political thought, political behavior, and associated constitutions and ...
, and
vaccine A vaccine is a biological preparation that provides active acquired immunity to a particular infectious or malignant disease. The safety and effectiveness of vaccines has been widely studied and verified. ...
s. 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.


Incentive

The underlying incentive which generates the free-rider problem can be explained via the application of the
Prisoner's dilemma The Prisoner's Dilemma is an example of a game analyzed in game theory. It is also a thought experiment that challenges two completely rational agents to a dilemma: cooperate with their partner for mutual reward, or betray their partner ("de ...
, 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. 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.


Economic issues

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 Public good may refer to: * Public good (economics), an economic good that is both non-excludable and non-rivalrous * The common good, outcomes that are beneficial for all or most members of a community See also * Digital public goods Digital pu ...
, with that value measured in terms of how much money they would be willing to pay, their tendency is to under-report their valuations. 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). This problem is sometimes compounded by the fact that common-property goods are characterized by rival consumption. 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 Tragedy (from the grc-gre, τραγῳδία, ''tragōidia'', ''tragōidia'') is a genre of drama based on human suffering and, mainly, the terrible or sorrowful events that befall a main character. Traditionally, the intention of tragedy ...
' 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 common-property 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 Ecosystem services are the many and varied benefits to humans provided by the natural environment and healthy ecosystems. Such ecosystems include, for example, agroecosystems, forest ecosystem, grassland ecosystems, and aquatic ecosystems ...
. An example of this is global climate change initiatives. As climate change is a global issue, the benefits of reduced emissions in one country will extend beyond their own countries' borders and impact countries from around the world. 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 Tuvalu ( or ; formerly known as the Ellice Islands) is an island country and microstate in the Polynesian subregion of Oceania in the Pacific Ocean. Its islands are situated about midway between Hawaii and Australia. They lie east-northea ...
. 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. 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 Altruism is the moral principle, principle and moral courage, moral practice of concern for the welfare and/or happiness of other human kind, human beings or animals, resulting in a quality of life both material and spirituality, spiritual. It ...
. 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 Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
) 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.


Economic and political solutions


Assurance contracts

An assurance contract is a contract in which participants make a binding pledge to contribute to building a public good, contingent on a quorum of a predetermined size being reached. Otherwise the good is not provided and any monetary contributions are refunded. A dominant assurance contract is a variation in which an entrepreneur creates the contract and refunds the initial pledge plus an additional sum of money if the quorum is not reached. The entrepreneur profits by collecting a fee if the quorum is reached and the good is provided. In game-theoretic terms this makes pledging to build the public good a dominant strategy: the best move is to pledge to the contract regardless of the actions of others.


Coasian solution

A Coasian solution, named for the economist
Ronald Coase Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase received a bachelor of commerce degree (1932) and a PhD from the London School of Economics, where he was a member of the faculty until 1951. ...
, proposes that potential beneficiaries of a public good can negotiate to pool their resources and create it, based on each party's self-interested willingness to pay. His treatise, '' The Problem of Social Cost'' (1960), argued that if the transaction costs between potential beneficiaries of a public good are low—that it is easy for potential beneficiaries to find each other and organize pooling their resources based upon the good's value to each of them—that public goods could be produced without government action. Much later, Coase himself wrote that while what had become known as the Coase Theorem had explored the implications of zero-transaction costs, he had actually intended to use this construct as a stepping stone to understand the real world of positive transaction costs, corporations, legal systems and government actions:
I examined what would happen in a world in which transaction costs were assumed to be zero. My aim in doing so was not to describe what life would be like in such a world but to provide a simple setting in which to develop the analysis and, what was even more important, to make clear the fundamental role which transaction costs do, and should, play in the fashioning of the institutions which make up the economic system.
Coase also wrote:
The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave. What I did in "The Problem of Social Cost" was simply to shed light on some of its properties. I argued in such a world the allocation of resources would be independent of the legal position, a result which Stigler dubbed the "Coase theorem".
Thus, while Coase himself appears to have considered the "Coase theorem" and Coasian solutions as simplified constructs to ultimately consider the real 20th-century world of governments and laws and corporations, these concepts have become attached to a world where transaction costs were much lower, and government intervention would unquestionably be less necessary. A minor alternative, especially for information goods, is for the producer to refuse to release a good to the public until payment to cover costs is met. Author
Stephen King Stephen Edwin King (born September 21, 1947) is an American author of horror, supernatural fiction, suspense, crime, science-fiction, and fantasy novels. Described as the "King of Horror", a play on his surname and a reference to his high ...
, for instance, authored chapters of a new novel downloadable for free on his website while stating that he would not release subsequent chapters unless a certain amount of money was raised. Sometimes dubbed ''holding for ransom'', this method of public goods production is a modern application of the street performer protocol for public goods production. Unlike assurance contracts, its success relies largely on social norms to ensure (to some extent) that the threshold is reached and partial contributions are not wasted. One of the purest Coasian solutions today is the new phenomenon of Internet
crowdfunding Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and Alternative Finance, alternative finance. In 2015, over was rais ...
. Here rules are enforced by computer algorithms and legal contracts as well as social pressure. For example, on the
Kickstarter Kickstarter is an American public benefit corporation based in Brooklyn, New York, that maintains a global crowdfunding platform focused on creativity. The company's stated mission is to "help bring creative projects to life". As of July 2021, K ...
site, each funder authorizes a credit card purchase to buy a new product or receive other promised benefits, but no money changes hands until the funding goal is met. Because automation and the Internet so reduce the transaction costs for pooling resources, project goals of only a few hundred dollars are frequently crowdfunded, far below the costs of soliciting traditional investors.


Introducing an exclusion mechanism (club goods)

Another solution, which has evolved for information goods, is to introduce exclusion mechanisms which turn public goods into club goods. One well-known example is
copyright A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, education ...
and
patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling disclo ...
laws. These laws, which in the 20th century came to be called
intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
laws, attempt to remove the natural non-excludability by prohibiting reproduction of the good. Although they can address the free rider problem, the downside of these laws is that they imply private monopoly power and thus are not Pareto-optimal. For example, in the United States, the patent rights given to pharmaceutical companies encourage them to charge high prices (above marginal cost) and to advertise to convince patients to persuade their doctors to prescribe the drugs. Likewise, copyright provides an incentive for a publisher to act like The Dog in the Manger, taking older works out of print so as not to cannibalize revenue from the publisher's own new works. Examples from the entertainment industry include Walt Disney Studios Home Entertainment's " vault" sales practice. Examples from the computer software industry include
Microsoft Microsoft Corporation is an American multinational corporation, multinational technology company, technology corporation producing Software, computer software, consumer electronics, personal computers, and related services headquartered at th ...
's decision to pull
Windows XP Windows XP is a major release of Microsoft's Windows NT operating system. It was release to manufacturing, released to manufacturing on August 24, 2001, and later to retail on October 25, 2001. It is a direct upgrade to its predecessors, Wind ...
from the market in mid-2008 to drive revenue from the widely criticized
Windows Vista Windows Vista is a major release of the Windows NT operating system developed by Microsoft. It was the direct successor to Windows XP, which was released five years before, at the time being the longest time span between successive releases of ...
operating system. The laws also end up encouraging patent and copyright owners to sue even mild imitators in court and to lobby for the extension of the term of the exclusive rights in a form of rent seeking. These problems with the club-good mechanism arise because the underlying marginal cost of giving the good to more people is low or zero, but, because of the limits of price discrimination those who are unwilling or unable to pay a profit-maximizing price do not gain access to the good. If the costs of the exclusion mechanism are not higher than the gain from the collaboration, club goods can emerge naturally. James M. Buchanan showed in his seminal paper that clubs can be an efficient alternative to government interventions. On the other hand, the inefficiencies and inequities of club goods exclusions sometimes cause potentially excludable club goods to be treated as public goods, and their production financed by some other mechanism. Examples of such "natural" club goods include natural monopolies with very high fixed costs, private golf courses, cinemas, cable television and social clubs. This explains why many such goods are often provided or subsidized by governments, co-operatives or volunteer associations, rather than being left to be supplied by profit-minded entrepreneurs. These goods are often known as ''social goods''.
Joseph Schumpeter Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at H ...
claimed that the "excess profits", or profits over normal profit, generated by the copyright or patent monopoly will attract competitors that will make technological innovations and thereby end the monopoly. This is a continual process referred to as "Schumpeterian creative destruction", and its applicability to different types of public goods is a source of some controversy. The supporters of the theory point to the case of Microsoft, for example, which has been increasing its prices (or lowering its products' quality), predicting that these practices will make increased market shares for Linux and Apple largely inevitable. A nation can be seen as a "club" whose members are its citizens. Government would then be the manager of this club. This is further studied in the theory of the state.


Altruistic solutions


Social norms

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. 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. 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 Altruism is the moral principle, principle and moral courage, moral practice of concern for the welfare and/or happiness of other human kind, human beings or animals, resulting in a quality of life both material and spirituality, spiritual. It ...
are often underestimated in economic solutions and the models from which they are derived.


Social sanctions (punishment)

Often on the foundation of game theory, experimental literature suggests that free riding situations can be improved without any state intervention by seeking to measure the effects of various forms of social sanctions. Peer-to-peer punishment, that is, when members sanction other members that do not contribute to the public good by inflicting a cost on "free-riders", is considered sufficient to establish and maintain cooperation. Although such punishment is often considered altruistic because it comes at a cost to the punisher, it is noted that the exact nature of motivation remains to be explored. Whether costly punishment can explain cooperation is disputed. Recent research finds that costly punishment is less effective in real world environments. For example, punishment works relatively badly under imperfect information where people cannot observe the behavior of others perfectly. 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. Other research build on the findings of
behavioral economics Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory. ...
, 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. 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.


See also

*
Economic surplus In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities: * Consumer surplus, or consumers' surplus, is the monetary gai ...
*
Freedom Riders Freedom Riders were civil rights activists who rode interstate buses into the segregated Southern United States in 1961 and subsequent years to challenge the non-enforcement of the United States Supreme Court decisions '' Morgan v. Virginia ...
* Forced rider *
Leech (computing) In computing and specifically in Internet slang, a leech is one who benefits, usually deliberately, from others' information or effort but does not offer anything in return, or makes only token offerings in an attempt to avoid being called a le ...
* The Logic of Collective Action * Moral hazard * Parasitism (social offense) *
Prisoner's dilemma The Prisoner's Dilemma is an example of a game analyzed in game theory. It is also a thought experiment that challenges two completely rational agents to a dilemma: cooperate with their partner for mutual reward, or betray their partner ("de ...
*
Tragedy of the commons Tragedy (from the grc-gre, τραγῳδία, ''tragōidia'', ''tragōidia'') is a genre of drama based on human suffering and, mainly, the terrible or sorrowful events that befall a main character. Traditionally, the intention of tragedy ...


Notes


Further reading

* * William D. Nordhaus, "A New Solution: the Climate Club" (a review of Gernot Wagner and
Martin L. Weitzman Martin Lawrence Weitzman (April 1, 1942 – August 27, 2019) was an economist and a professor of economics at Harvard University. He was among the most influential economists in the world according to Research Papers in Economics (RePEc). His late ...
, ''Climate Shock: The Economic Consequences of a Hotter Planet'',
Princeton University Press Princeton University Press is an independent Academic publishing, publisher with close connections to Princeton University. Its mission is to disseminate scholarship within academia and society at large. The press was founded by Whitney Darrow, ...
, 250 pp, $27.95), ''
The New York Review of Books ''The New York Review of Books'' (or ''NYREV'' or ''NYRB'') is a semi-monthly magazine with articles on literature, culture, economics, science and current affairs. Published in New York City, it is inspired by the idea that the discussion of i ...
'', vol. LXII, no. 10 (June 4, 2015), pp. 36–39. * * P. Oliver
Sociology 626
published b
Social Science Computing Cooperative
University of Wisconsin A university () is an institution of higher (or tertiary) education and research which awards academic degrees in several academic disciplines. ''University'' is derived from the Latin phrase ''universitas magistrorum et scholarium'', which ...
{{Authority control Market failure Tragedy of the commons Dilemmas