The free rider problem

Who a free rider is. A free rider is someone who gets the benefit of a good while avoiding any payment for it. The free rider problem arises when many people behave this way at once: each waits for others to pay, too little money is collected, and a good that is worth more to the group than it costs is provided in too small a quantity, or not provided at all.

Why the problem arises.

• Non-excludability. The problem belongs to goods from which non-payers cannot be shut out, or can be shut out only with extreme difficulty, above all public goods, which are non-excludable and non-rival. Once such a good exists, a person enjoys it whether she paid or not.
• Each person's reasoning. If enough others pay, she gets the good anyway without paying; if they do not, her own payment alone will not secure it. In both cases holding back seems to serve her better, so most hold back.
• A positive externality. What one person pays for also benefits others who give her nothing in return. She counts only her own share of the benefit when deciding whether to pay, so private payments fall short; the SOL traces the free rider problem to exactly this positive externality.
• Hidden valuations. People also have a reason not to reveal how much they value such a good, for example because the figure might be used to tax them.

Example: repairing a village approach road. Our own figures. The only road linking a village of 80 households in Uttarakhand to the main highway is broken. Repairing it costs ₹96,000. Each household would gain ₹1,500 from a usable road (quicker trips to the market and the clinic), so the total benefit is 80 × ₹1,500 = ₹1,20,000, more than the cost.

• Once repaired, the road is open to every household, payer or not (non-excludable), and one family's use, on a road that never gets crowded, does not spoil it for another (non-rival).
• The panchayat asks for voluntary contributions. Since no household would pay more than its own gain of ₹1,500, the ₹96,000 needs at least ₹96,000 ÷ ₹1,500 = 64 paying households even if each pays its full gain; if they pay less, more households must contribute. Many reason that the road will be repaired by the others, and only, say, 40 pay: 40 × ₹1,500 = ₹60,000 is collected, the repair does not happen, and a project worth ₹1,20,000 against a cost of ₹96,000 is lost.

What it leads to. Goods whose total benefit exceeds their cost go unprovided, or are provided in too small a quantity: left to the market, a public good is supplied in an inefficient quantity.

How it can be overcome.

• Compulsory payment. If every member must pay a fixed share, no one can ride free. Here a charge of ₹96,000 ÷ 80 = ₹1,200 on each household, less than its gain of ₹1,500, would fund the repair. For a whole society this is done through taxes, with the government providing the good.
• Cost-benefit analysis. The government decides which public goods to supply by comparing total benefit with total cost, going ahead when the benefit is larger. The rule works only when costs and benefits can be measured in the same unit.
• Making exclusion possible. Where a new method lets the supplier cut off non-payers, a private firm can provide the good for a fee; lighthouses came to be run by firms that charged ports and could switch off the light for a port that refused to pay.

Conclusion. The free rider problem is the tendency of people to enjoy a non-excludable good without paying for it, which leaves such goods under-provided even when they are worth more than they cost. Making payment compulsory, usually through government provision financed by taxes, is the standard remedy.