The free rider problem

Who is a free rider. A free rider is a person who enjoys the benefit of a good but avoids paying anything for its use. The free rider problem is what follows when many people behave this way: everyone wants the good, but too few are willing to pay for it, so the good is under-supplied or not supplied at all.

Why the problem arises.

• Non-excludability. The problem belongs mainly to public goods, which are non-excludable and non-rival. If a non-payer cannot be kept from using a good once it exists, there is no need to pay to enjoy it; each person can hope that others will pay and still get the benefit.
• A positive externality. One person's payment benefits everyone else, who did not pay for it: an action that benefits another without any payment from the one who benefits is a positive externality, and the free rider problem arises from it. The person deciding whether to contribute counts only her own benefit, not the benefit to all the others, so she contributes less than is socially worthwhile.
• Non-rivalry makes matters worse: since one more user costs nothing and takes nothing from others, no one feels responsible for paying.

Example (our own). An irrigation channel serving 80 farms in a village in Bihar silts up every year. Desilting it before the sowing season costs ₹1,20,000, and each farm would gain ₹2,500 from the better water supply, so the village as a whole would gain 80 × ₹2,500 = ₹2,00,000.

• Since the benefit to the village (₹2,00,000) exceeds the cost (₹1,20,000), desilting is clearly worthwhile.
• But once the channel is cleared, water reaches every farm along it, whether or not its owner paid. Each farmer reasons that if the others pay, he gets the water free, and if they do not, his ₹1,500 share alone will not get the work done.
• So each waits for the others, the collection falls far short of ₹1,20,000, and the channel stays silted, although every farmer would have been better off paying ₹1,500 for a gain of ₹2,500.

The consequence: a worthwhile good is not provided. The free rider problem is a reason why markets fail to supply public goods: left to private payment, a public good is provided in an inefficient quantity, often not at all, even when its benefits exceed its costs. People also have a reason not to reveal how much they really value such a good, if they fear that what they say will be used to charge them.

How the problem can be overcome.

• Make payment compulsory. If the group sets up a rule under which every member must pay a fixed share, the free rider problem disappears. In the example, the village panchayat could levy ₹1,500 on every farm.
• Public provision on a cost-benefit test. The government can supply the good itself, paid for out of taxes, after checking that its total benefit exceeds its total cost. The irrigation department could desilt the channel because ₹2,00,000 exceeds ₹1,20,000.
• Find a way to exclude non-payers. If technology or organisation makes it possible to shut out those who do not pay, the good can be sold like a private good, and the free rider problem goes away. If the channel's outlets to each field could be locked, water could be supplied only to farms that had paid.

Conclusion. The free rider problem arises because a non-excludable good benefits people whether or not they pay, so each person leaves the paying to others and a good worth more than its cost may not be provided at all. It is overcome by making contributions compulsory, by public provision where benefits exceed costs, or by finding a way to exclude non-payers.