Free rider problem

Meaning. A free rider is a person who enjoys the benefit of a good without paying for it. The free rider problem arises when so many people try to do this that the good is not paid for, and so is not provided at all, even though its benefit to the group is greater than its cost.

Why it arises: public goods. The problem belongs to goods that are non-excludable, above all public goods, which are both non-excludable (no one can easily be kept from using them) and non-rival (one person's use does not reduce what others get): street lights, law and order, national defence.

• Once the good is provided, everyone benefits whether or not she has paid.
• So each person reasons that if the others pay, she gets the good free, and if they do not, her payment alone will not provide it. Either way, not paying looks better.
• The good confers a benefit on others for which the provider is not paid, a positive externality, and private payment fails.

Example: clearing a storm drain. Our own figures. Sixty houses along a lane in Jaipur are flooded every monsoon because the shared storm drain is choked. Clearing it costs ₹90,000. Each house would gain ₹2,000 from a dry monsoon, so the total benefit is ₹1,20,000, more than the cost: clearing the drain is worth it for the lane. But once the drain is clear, no house can be kept from the benefit. If contributions are voluntary, many households hold back, hoping the others will pay; if fewer than 45 houses pay ₹2,000 each, the money falls short of ₹90,000, the drain stays choked, and every house loses a benefit worth more than its share of the cost.

Consequence and remedies.

• Consequence: goods with benefits greater than their costs are provided too little, or not at all, by private arrangement.
• Compulsory payment: if every member must pay a fixed charge, the free rider problem disappears; here a charge of ₹1,500 on every house (₹90,000 shared by sixty). For society as a whole, the government provides public goods (defence, street lights, policing) and pays for them from taxes.
• Where exclusion can be made cheap, a fee can be charged (a toll or a subscription), turning the good into a club good.

Conclusion. The free rider problem is the tendency of people to enjoy a non-excludable good without paying for it, which leads to too little of it being provided; compulsory payment, usually through government provision financed by taxes, is the standard solution.