The free rider problem

Meaning. A free rider is a person who gets the benefit of a good but avoids paying anything for its use. The free rider problem is what follows when many members of a group behave this way: each one holds back in the hope that the others will pay, too little is collected, and a good that the group values at more than its cost ends up not being provided.

Why it arises. The problem belongs to goods that are hard to charge for, above all public goods, which have two properties:

• Non-excludable. Once the good exists it is extremely hard to keep anyone from enjoying it. Paying is therefore not a condition of benefiting, and this is the direct cause of free riding.
• Non-rival. One person's use does not reduce the amount left for others. The person who does not pay takes nothing away from those who do, so no one is pushed to stop him.

The SOL traces the problem to a positive externality: each contributor's payment benefits the others, who pay her nothing for it, and she counts only her own gain when deciding whether to pay. People also have a reason to hide how much they value a public good, because what they reveal may be used for tax purposes. In a large group, where no single payment decides whether the good is provided, each person reasons: if the others pay, I get the good free; if they do not, my payment alone will not provide it. Not paying then looks best whatever the others do.

Example: solar street lights in a Lucknow lane. Our own figures. Seventy-five houses share an unlit lane. Solar street lights would cost ₹1,50,000 to install, and each house values a lit lane at ₹3,000, so the total benefit is ₹2,25,000, well above the cost. An equal share would be ₹2,000 a house, leaving every house ₹1,000 better off. But once the lights are up, a house that has not paid cannot be kept in the dark. If contributions are voluntary and only 50 houses pay ₹2,000, just ₹1,00,000 is raised, ₹50,000 short; the lights are not put up, and every house, payers and non-payers alike, loses a benefit of ₹3,000.

Consequence. Left to voluntary payment or to the market, a public good is supplied in an inefficient quantity, too little or none at all. In the example the lane loses a net gain of ₹75,000 (₹2,25,000 of benefit less ₹1,50,000 of cost).

Remedies.

• Compulsory payment. If every member must pay a fixed share, the free rider problem goes away; here, a levy of ₹2,000 on each of the 75 houses.
• Government provision. Because of their public-good nature, goods such as national defence are provided by the government. It uses cost and benefit analysis to decide which of them are worth providing.
• Finding a way to exclude. Where a practical way to shut out non-payers is found, the good can be supplied through the market, with a charge; for instance, a residents' society can fence a community garden and sell entry passes.

Conclusion. The free rider problem is the tendency to enjoy a non-excludable good without paying for it. Because each person's payment mainly benefits others, voluntary payment falls short and the good is under-provided; compulsory contributions and provision by the government are the standard remedies.