Report: The Free Rider Problem (0)

Tartu Secondary School of Business
The Free Rider Problem
Airo Kõrgesaar
Form B
Tartu 2009
Content
Content 2
The Political Problem 3
The Example 4
Solution and Problems 5
The Main Economical Problem 6-8
Free riding Problem on Public Transport 9
References 10
The Political Problem
A common example of a free rider problem is defense spending: no one person can be excluded from being defended by a state's military forces, and thoes free riders may refuse or avoid paying for being defended, even though they are still as well guarded as those who contribute to the state's efforts. Therefore , it is usual for governments to avoid relying on volunteer donations, using taxes and, in some countries, conscription instead.
In the case of defense spending, alternative perspectives of the free rider problem also exist . A free rider may be an individual or group of military contractors, ideologues, government officials or lobbyists that inflate the risk of enemies, or even convinces the state to launch an unnecessary and expensive war, in order to sell more arms and consolidate their power . In this example, the free riders avoid all of the personal risks of war while enjoying the benefit of tax dollars spent under the false popular perception of the urgent need for national defense.
Government is indeed the primary mechanism by which societies address free rider problems. In addition to fiscal measures noted above , regulation is another form of collective action taken by governments to resolve free riders problems such as environmental degradation or excessive resource use.
The free rider problem is also one justification for the existence of governments which provide public goods . Some ideologies, such as libertarian capitalism, are often rebuked, because in such a system all property in a society would be privately owned , away from any state involvement or regulation. Libertarians counter that potential free riders within their system could face social ostracism, which may deter those who accept services without donating any payment for them . Libertarians stress that the need to healthily co-operate and interact with others in society would lessen the risk and likelihood of free riders.
The Example
The free rider problem has deep roots in more general bargaining, and issues to do with incentive compatibility. That is to say that, when involved in bargaining problems, players may often bid less than they are prepared to pay in the hope of improving their own position . This creates problems because it is impossible to discover the players' true demand payoff curves. Suppose there is a street , on which 25 people live , and which suffers from a litter problem. A weekly street-cleaning service would cost $2,500 annually. Suppose that each person is prepared (i.e., able and willing) to pay $100 or more for the benefit of a cleaner street.
If the service is engaged, everyone will benefit. However , it is possible that some people on the street will refuse to pay, anticipating that the service will be undertaken in any event.
Despite the fact they may be prepared to contribute $100, they will claim that they are not prepared to pay, and instead hope that others in the street will pay for the system anyway, and they receive the benefit for no personal expense.
The result is that it is possible no system will be installed, an example of market failure . This is despite the fact that allocative efficiency would be improved.
Solution
One common solution to the problem is to gather the 25 participants and make them behave like one customer, so the decision is reduced from 25 independent decisions to one. A vote can be taken, but if the answer is yes, everyone will be forced to pay for their individual support . This is why public services such as military defense and police service are provided by governments.
The Main Economical Problem
The free rider issue has become one of the most serious economic issues today . The free rider is a lazy type person who wants the benefits that others bring in without having to do the work . The free rider typically takes advantage of a public good . Living in a civilized society presents many opportunities for free riding, which we have yet to find a way to control . Economists regard the possibility for free riding as a problem for the free market, which usually leads to government intervention . Government intervention is not generally needed in a free market society but in this case if there were no government intervention this problem would not find a solution.
The free-rider issue is often seen as a serious problem because of the assumption that a free rider's best self- interest is that they interact with others by force and fraud. If they can get away with the fraud and begin to gain the benefits of others they have reached their first goal . Their next goal is to make some good money or get credit for someone else's hard work before they get caught. Then they get out and are long gone by the time anyone notices. Life in a civilized society allows each of us the opportunity to enjoy the benefits of the work of people with productive ability far greater than our own, but what happens when people begin doing this? They get used to not having to do much work and become lazy. In some cases people look at welfare in this way. If a person is able to get a good job and chooses not to, but instead, to live on our government, this would be considered free riding. This causes a fluctuation in our market and it can have a negative effect . When the benefits go away people do not want to go back to work and eventually will loose their jobs or quit and become a true free rider.
Clearly there is an essential difference between cases in which one can't contribute to the benefits one enjoys and cases in which one chooses not to make a contribution that is within one's power. But apart from this distinction, we can differentiate between harmless free riding and the worthless free riding. The free rider wants anything he can get for free and will think nothing of it if he can get away with it.
Free riders take advantage of public goods without having to contribute to them. For example, if society decides to encourage people to use less of a product and many people actually respond to this call, the product's market will improve. Although the free rider may continue using this product, he will benefit. This creates a tremendous problem for activists who attempt to start a movement to improve the environment. Many people, seeing no incentive to join personally in the movement, just continue behaving the way they did before and yet reap the benefits of other people's work.
When everyone acts as a free rider, no benefit at all will come from the proposed action. Because it is in everyone's personal interest not to participate in the collective movement, the movement is highly vulnerable to failure. Though society as a whole may try to conserve a resource, the free rider can easily take advantage of this by not participating in the conservation effort. Those who believe in the concept of the free rider and the problems such people create might advocate government policy to require everyone to take part in efforts to improve the environment. Such people might contend that government action is the only fair and reliable way to prevent environmental problems. David Hume recognized the free-rider problem associated with public goods, even before the time of Adam Smith's writings. Each citizen who can enjoy the benefit of a public good has an incentive to try to lay the whole burden of provision on others, whenever the exclusion of nonpayers is very costly or impossible.
Markets work to exhaust the gains from trade and cooperation because each individual has an interest in finding and capturing any and all such gains. Of course , when free riders can enjoy a public good without payment or trade, production and the potential gains from it may never occur. Efforts to originate government programs and to control them in the public interest are no different .
The public decision- making process is a procedure for generating a public good and the persons involved in it, whether they are the voters, judges, legislators, or civil servants, all can be expected to treat it as any other public good. A public good is a very special class of goods, which cannot practically be withheld from one individual consumer without withholding them from all. In other words, a public good is given to everyone.
The free riders like public goods because they are easy to get to and there are tons of them. When there are this many goods, it is hard to spot some of them missing until a bunch are gone and by that time the free rider has moved on too.
When this good is used and not paid for, the results can be very ugly. The free rider takes these goods for free, leaving the rest of the hard working people to make up the difference. This difference we have to make up is usually a higher tax. In raising the tax the price of the good goes up and when price goes up demand tends to go down. As the demand keeps falling and the price keeps rising the product usually ends up off the market and filing a chapter eleven . It typically does not go that far but this is an example of what could happen . A free market is a privilege to have and it is a shame people have to take advantage of it because they do not feel the need to work hard or to go out of their way to do something for someone else.
The free rider is a menace in our society and we do not need to let him take our money and put it to his use. We have found ways such as government intervention and price lids to help control the problem but we have yet to find a solution. Once a solution is found we will have fewer worries and possibly a true free market. These are very difficult problems to stop and may never be stopped. It will take a long period of time to begin the process to bring it to an end, but it will be nice to maybe some day have a true free market without the problem of a free rider.
Freeriding Problem on Public Transport

Freeriding insurance

United we stand strong! “P-kassan” – the freeriding insurance – is a cooperation between people in similar situations. We do not afford the fare or do not want to pay it. You pay a small amount to the fund and if you get caught freeriding your bill is payed. The idea of this insurance is not new. It has been tried before and for quite some time, especially by students in the university cities, and has worked well even though in a small scale. The difference is that we have a greater goal than just helping each other to freeride . We want free public transportation, owned by us together and controlled by the workers in it.

Everyone will benefit from free transports

In Stockholm , all those who make less then 40 000 kronor per month (about 4500 euros) would benefit by letting a small tax raise finance the public transportation. Free public transportation is a way of taking from the richest and giving to the rest of us. It is about time for that kind of redistribution in our segregated cities.
And think about the socioeconomic gains that could be achieved by getting rid of all the ticket lines, tickets and control systems. Lots of money goes to these systems which leads to nothing but a bad mood in our common spaces.

Prioritize public transportations instead of cars

In the long run free public transportation would lead to other positive effects, like a better urban environment with less traffic jams. Today car traffic is prioritized at the expense of public transportation. Roads are financed by tax money and are free to use, but the public transportation is financed by fares. It is rather strange that the authorities punish those who choose the means of travel that suits the environment best.
References
http://en.wikipedia.org/wiki/Free_rider_proble m
http://plato.stanford.edu/entries/free-rider/
http://www.investopedia.com/terms/f/free_rider_problem.asp
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