Economics
Free Rider Problem
The free rider problem refers to a situation where individuals benefit from a public good without contributing to its production. This can lead to under-provision of the public good, as individuals have an incentive to "free ride" on the contributions of others. It is a common challenge in economics and public policy, requiring mechanisms to ensure fair and efficient provision of public goods.
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9 Key excerpts on "Free Rider Problem"
eBook - ePub- Samuel S Komorita, Craig D Parks(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
Public goods are a pervasive part of society. Almost everyone has some degree of contact, and must make some decisions about, public goods. The topic has interested researchers in economics, political science, and sociology, as well as psychology.Free riding, or the noncontribution to a public good, is presumed to have many causes. Among them are lack of self-efficacy, variables accompanying group size, and fear, either of being taken advantage of or of having one’s efforts wasted. Many other variables have been hypothesized to affect free riding, but have not yet been adequately tested.Attempts to minimize free riding include encouraging free discussion, offering guarantees and/or fair-share requirements, sanctioning noncontributors, and changing the method of contribution. Researchers continue to attempt to find solutions that could reasonably be implemented in real-world situations.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
APPLICATION 20.1 1 This application is based on “A Stephen King Online Horror Tale Turns into a Mini-Disaster,” www.nytimes.com, November 29, 2000. Free Riding and Group Size When public goods are involved, free riding is rational, but it hinders the ability of private markets to cater efficiently to the demand for a public good. In the example just discussed, enough people could conceivably contribute so that the dam would be financed by voluntary agreements. With just 10 people involved, only a small number need to agree to contribute. The severity of the free-rider problem, however, varies with the number of people involved. 512 Chapter Twenty • Public Goods and Externalities • The larger the number of people receiving benefits from a public good, the less likely that voluntary cooperation will ensure its provision. As the group size increases, it is more likely that everyone will behave like a free rider, and the public good will not be provided. To illustrate, let’s change our example slightly and assume that a dam now benefits 1,000 people, each by $2,000. (Note that the total benefit is still $2,000,000, just as before.) In this case, faced with deciding whether or how much to contribute voluntarily, each person will realize that one single contribution has virtually no effect on whether the dam is built. Put differently, the outcome depends mainly on what the other 999 people do, and whether any one person contributes will not affect the others’ decisions. In this case each person gets the same benefit whether or not any contribution is made, and choosing not to contribute is the most rational behavior. Because this is true for everyone, few people will contribute, and the good likely will not be provided. Many real-world examples provide evidence of free-rider behavior with public goods.
eBook - PDFSocial Entrepreneurship Business Models
Incentive Strategies to Catalyze Public Goods Provision
- K. Sommerrock(Author)
- 2010(Publication Date)
- Palgrave Macmillan(Publisher)
This phenomenon is caused by the different incentive effects of private and public goods. 20 The 78 Theoretical Perspectives externalities and characteristic of non-excludability of public goods means that every person has an identical benefit from the public good once it has been provided. Thus everybody is stimulated to contribute as little as possible and benefit from the product as a free rider. Free riders would not pay for using the good as they can benefit from it even if they do not pay for it. Because it is impossible to exclude free riders from the consumption of a public good no one is willing to pay for the good. An example is the construction of a dike to protect people against storm tides. Once constructed, every inhabitant will benefit from the dike, no matter whether he contributed to its construction costs or not. Thus people have an incentive to hide their preference for having a dike and to avoid contributing to its construction, hop- ing that they can benefit from it in any case, since others might finance it. Musgrave describes the results of the non-excludability characteristic of public goods: ‘[Social] wants cannot be satisfied through the mecha- nisms of the market because their enjoyment cannot be made subject to price payments.’ 21 Consequently, rational benefit maximizing individuals will not reveal their true preferences or their willingness to pay voluntarily for public goods. 22 Because of the option of free riding, potential consumers are moti- vated to hide or diminish their true consumption preferences regarding public goods. 23 Thus provision of these goods through market mecha- nisms fails because of the lack of incentives to reveal preferences and contribute to the production of the good. While a certain level of demand exists for these kinds of goods, the market mechanism fails because people would rather consume the product or service as a free rider than to pay for it.
eBook - ePub- Aaron Wildavsky(Author)
- 2018(Publication Date)
- Routledge(Publisher)
The first flaw is the assertion that there is “no incentive” to pay for such services voluntarily. This argument assumes that the free rider incentive is the only incentive that motivates people to act. Karl Fielding addresses this point: “There may be incentives for individuals to act in accordance with good will, Christian charity, Kantian duty, civic pride, or any number of other reasons for individuals to contribute their full share toward the private provision of goods.” 40 The evidence supports Fielding’s assertion. Experiments carried out with groups of individuals who are faced with such choices indicate a more honest revelation of preferences than that predicted by free rider theory. 41 This is often termed “free revelation” to contrast with “free riding.” One economist was so persuaded by the evidence for free revelation that he concluded: “I do not know of many historical records or other empirical evidence which show convincingly that the problem of correct revelation of preferences has been of any practical significance.” 42 A second flaw implicit in free rider theory assumes that everybody places the same value on goods. Consider Edwin Mansfield’s statement: “Whether or not citizens contribute to their [public goods] costs, they benefit from them.” 43 Indeed, they may benefit from them. The problem is, they also may not. That brings us to the irremediable subjectivity of goods. A good is not an item in the store with a price tag on it. If that were so, then we could put a barrel of toxic waste on the shelf, price it at $1000 a pound, and it would then be a good. No, a good is something someone values in exchange. Someone must be willing to give something else up for it. Truly, goods are only goods for those in whose eyes they are good enough. Such a definition of goods as subjective opportunity costs may seem trivial, but it is not
- Roberto Serrano, Allan M. Feldman(Authors)
- 2018(Publication Date)
- Cambridge University Press(Publisher)
If the good is private, this makes sense, because the consumer doing the buying is the only one getting that benefit; from a social perspective, the benefit of that last unit just equals $1. But if our consumer is buying another unit of the public good, it creates a marginal benefit for him and for others as well . Therefore, from the social perspective, that last unit of the public good purchased by one consumer results in an aggregate benefit that far exceeds its cost. This means that if a public good is bought on a private market like a private good, the market equilibrium quantity of the good will be too low . 18.5 The “Free Rider” Problem and Voluntary Contribution Mechanisms In Section 18.3 above, we presented an example to show that the standard market mechanism results in a non-optimal or inefficient amount of public good. In our example, we had two identical consumers. Consumer 1 went first and bought x M 1 units of the public good. Consumer 2 went second, and he bought no public good at all. He saw that consumer 1 had already bought x M 1 , which was there for consumer 2 to enjoy because the good is public. In other words, consumer 2 took a free ride on consumer 1’s prior purchase of the public good . This was an example of a widespread problem called the Free Rider Problem. 360 18 Public Goods The equilibrium we described in that section was slightly special because it obviously depended on which consumer moved first. In this section, we will tell a somewhat different story about the provision of the public good, a story that is slightly more general, and more in line with the game theoretic Nash equilibrium concept. However, the new story has the same moral as the old; the provision of public goods creates free riders , resulting in non-optimality or inefficiency. This is the story of a voluntary contribution mechanism to supply the public good . We will again assume there are two consumers with quasilinear preferences.
eBook - PDFMicroeconomic Theory
Basic Principles and Extensions
- Walter Nicholson, Christopher Snyder(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
It is true that the public-good problem tends to get worse as the number of agents increases beyond two. Each person considers only his or her benefit from investing in the public good, taking no account of the benefits spilling over to others. With many consum-ers, the direct benefit may be very small indeed. (For example, how much do one person’s taxes contribute to national defense in the United States?) In the limit as the number of consumers grows into the thousands or millions, any one person may opt for providing essentially none of the public good, becoming a pure “free rider,” hoping to benefit from the expenditures of others. If every person adopts this strategy, then no resources will be allocated to public goods. Example 19.3 illustrates the free-rider problem in a situation that may be all too familiar, starting from two agents and working up to a large number. To analyze strategic behavior rigorously, we will look for the Nash equilibrium using the tools learned in the chapter on game theory. EXAMPLE 19.3 The Roommates Dilemma To illustrate the nature of the public-good problem numerically, suppose two roommates, A and B , having identical preferences derive utility from the cleanliness of their room and the knowl-edge gained from economics texts read. The specific utility function for roommate A is U A 1 x , y A 2 5 x 1/3 y 2/3 A , (19.41) where y A is the number of hours A spends reading and x 5 x A 1 x B is the sum across roommates of the hours spent cleaning. Roommate B has the analogous utility function. In this problem, x is the public good and y is the private good. Assume each roommate can spend up to 10 hours on these activities during the week. Thus 10 is like income in their budget constraint and the effec-tive prices of the activities (in terms of time) are both 1 (one hour).
eBook - PDFIncentives
Motivation and the Economics of Information
- Donald E. Campbell(Author)
- 2018(Publication Date)
- Cambridge University Press(Publisher)
However, the production technology does not require any individual ’ s sacri fi ce to be proportional to his or her bene fi t from consuming the public good. (An individual who makes no con-tribution at all to the fi nancing of X is said to be a free rider , because that person consumes the same amount of X as someone who did contribute.) Truthful preference revelation is very hard to elicit because of the Free Rider Problem, but e ffi ciency requires the amount of public good X produced to be a function of reported preferences, and hence so is the share of the fi nancing of X contributed by each individual. Without very carefully designed incentives, individuals will be able to misrepresent their preference scheme in a way that signi fi cantly reduces their share of the cost of fi nancing the public good – and hence leaves a lot of disposable income for purchasing private goods – without appreciably reducing the level of X available for consumption. This would give that person a net increase in utility, relative to truthful revelation. (With a large number of indi-viduals, the loss of one person ’ s contribution to the fi nancing of X will have a tiny e ff ect on the amount of X produced.) The previous chapter examined public sector decision making in a very abstract model. In this chapter we endow the model with much more structure, including a production function and resource constraints, and by employing individual utility functions with classical economic properties. 8.1 THE ECONOMIC MODEL The hypothesis of the Gibbard-Satterthwaite Theorem of Chapter 7 assumes that any logically possible ordering of the alternatives is a plausible preference scheme for any individual. An explicitly economic model places restrictions on individual preferences. For example, if everyone has more of every good when the economy is in state x than when it is in state y we can rule out individual preferences that have y ranking above x.
- Annabelle Lever(Author)
- 2012(Publication Date)
- Cambridge University Press(Publisher)
This explains why governments grant temporary exploitation licences for which different companies compete. The latter strategy comes down to grant the right to internalize (part of) the positive externalities. Whatever the specific exceptional institutional arrangement which copes with the ‘public good’ characteristic, it comes down to an institu- tional ‘scheme’ that ‘confers benefits by making requirements of benefi- ciaries’, either tax revenue or specific fares, for the benefits. 18 As several authors have noted, it seems prima facie unfair to free-ride on such a scheme, which is only viable when most other people satisfy the require- ments. 19 Not only would widespread free riding undermine the very institutional scheme, it is moreover unfair to accept the benefit from such an institutional arrangement by taking advantage of others’ benefit- producing compliance. However, this delineation between fair and unfair free riding (i.e. taking a free ride is acceptable unless it is on an institutional scheme which copes with a public good problem) is again too hasty. Garrett Cullity has 17 Lemley, ‘Property, Intellectual Property, and Free Riding’, 1050. 18 Cullity, ‘Moral Free Riding’, 14. 19 See, e.g., R. Arneson, ‘The Principle of Fairness and Free-Rider Problems’ Ethics 92 (1982) 616–33. 266 Geert Demuijnck convincingly argued that free riding on cooperative schemes which are set up to resolve ‘public good’ problems is only unfair when three conditions are satisfied. If they are not, free riding may, arguably, be fair. The conditions that allow us to say that taking a free ride on an institutional scheme is unfair are the following. First, the practice of participation in the institutional schema represents a net benefit for the potential free-rider. No free-rider can be blamed if his regular participation in the scheme would have made him worse off than he would have been without the existence of the scheme.
- R. Sugden(Author)
- 2004(Publication Date)
- Palgrave Macmillan(Publisher)
7 Free Riders 7.1 Free riding and the prisoner’s dilemma game In the one-off prisoner’s dilemma game, the two players face only one problem: that of enforcing an agreement that they would both like to make. If some external mechanism for enforcing agreements is made available to the players, the game becomes trivial. There is no way in which either player can sensibly try to hold out for anything better than an agreement of mutual co-operation. The only threat a player has is to refuse to co-operate; but if one player refuses to co-operate it will be in the other player’s interest to defect, and then the outcome will be worse for both players than if they had agreed to co-operate. To put this another way, neither player can have any expectation of a free ride: there is no possibility that a player will be able to defect while his opponent co-operates. In the extended game, and in the absence of any mechanism for enforcing agreements, a player may be able to take a free ride in occasional rounds, by exploiting his opponent’s uncertainty about his intentions; but no one can realistically expect to free ride consist- ently. As soon as your opponent realizes that you have no intention of co-operating with him, it will it will not be in his interest to co-operate with you. I shall argue that it is because free riding is not a real option in the prisoner’s dilemma game that strategies of reciprocal co-operation can evolve so easily. (That such strategies do tend to evolve was, of course, the central argument of Chapter 6.) I shall present this argument by investigating some games with a family resemblance to the prisoner’s dilemma game; in some of these games free riding is not a real option for the players, but in others it is. 126 Free Riders 127 7.2 The mutual-aid game Before the introduction of state insurance schemes, the sickness of a wage-earner could easily lead to financial ruin for working-class families.
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