Friday, 28 July 2017

Investopedia: What is the 'Free Rider Problem'?

Free Rider Problem
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What is the 'Free Rider Problem'

The free rider problem is a market failure that occurs when people take advantage of being able to use a common resource, or collective good, without paying for it, as is the case when citizens of a country utilize public goods without paying their fair share in taxes. The free rider problem only arises in a market in which supply is not diminished by the number of people consuming it and consumption cannot be restricted. Goods and services such as national defense, metropolitan police presence, flood control systems, access to clean water, sanitation infrastructure, libraries and public broadcasting services are able to be obtained through free riding.

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BREAKING DOWN 'Free Rider Problem'
Free riding depletes from a tax base, can be the cause of natural resource exploitation and can even lead to the disappearance of the good's supply if enough people jump on board with the mentality. The psychology behind it for certain people is there is little incentive to expend money or time toward the production of a collective good when they stand to enjoy its benefits even if they expend none at all.

Because the free rider problem occurs with public goods, governments are usually the ones left to enforce as much regulation as possible to deter people from engaging in the practice. In the United States, the Internal Revenue Service (IRS) is the agency in charge of collecting taxes and upholding tax laws. The crime of attempting to evade or defeat tax carries a maximum penalty of five years in prison and/or a $250,000 fine, which is $500,000 for corporations.

Free riding also occurs in a workplace that is partly unionized, because all of the company's employees experience wage hikes and a better working environment, regardless of whether they belong to the union.

Behavioral Tendencies and Tragedy of the Commons

On a deeper level, free riding reflects a behavioral tendency, the tendency to shirk responsibility or work when the effects of doing so are minimal or when the negative effects do not have an immediate and direct impact. This tendency is one of the forces leading to what was coined by Garrett Hardin in 1968 as the "Tragedy of the Commons," when the well-being of society or a particular market is overlooked for personal gain.

A natural example of the Tragedy of the Commons is when an abundant acre of grass is overgrazed to the point where the field becomes barren and prone to soil erosion. Cod fisheries off the coast of Newfoundland experienced the Tragedy of the Commons in the 1960s when new fishing technologies allowed fisherman to catch a significantly larger amount, ultimately resulting in the collapse of an industry that had existed for hundreds of years.
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    Living and Death Benefit Riders
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    Common Resource
    Common Pool Resource - CPR
    IRS Publication 910 -
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    Family Income Rider
    Private Good

Tragedy Of The Commons
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The tragedy of the commons is an economic problem in which every individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits. Generally, the resource of interest is easily available to all individuals; the tragedy of the commons occurs when individuals neglect the well-being of society in the pursuit of personal gain.
BREAKING DOWN 'Tragedy Of The Commons'

The tragedy of the commons is a very real economic issue where individuals tend to exploit shared resources so the demand greatly outweighs supply, and the resource becomes unavailable for the whole. Garrett Hardin, an evolutionary biologist by education, wrote a scientific paper titled "The Tragedy of the Commons" in the peer-reviewed journal Science in 1968. The paper addressed the growing concern of overpopulation, and Hardin used an example of grazing land when describing the adverse effects of overpopulation.
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