Free Rider Problem

AAA

DEFINITION of 'Free Rider Problem'

1. In economics, the free rider problem refers to a situation where some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource.

2. In the context of a brokerage firm, a free rider problem refers to a situation where a client has been allowed to purchase shares without actually paying for them, and then subsequently sells the shares (ideally for profit).

INVESTOPEDIA EXPLAINS 'Free Rider Problem'

1. A commonly used example of the economic notion of the free rider problem is found in national defense. All citizens of a country benefit from being defended; however, individuals who evade taxes are still protected by the same common resource of national defense, even though they did not pay for their fair share of the resource.

2. The problem with this scenario is that the client, if allowed to free ride, can profit from a stock trade without actually using any of his or her own capital. This is illegal.

RELATED TERMS
  1. Public-Private Partnerships

    A business relationship between a private-sector company and ...
  2. Private Good

    A product that must be purchased in order to be consumed, and ...
  3. Public Good

    A product that one individual can consume without reducing its ...
  4. Diner's Dilemma

    A game-theory situation with several players. Similar to a prisoner's ...
  5. Tragedy Of The Commons

    An economic problem in which every individual tries to reap the ...
  6. Game Theory

    A model of optimality taking into consideration not only benefits ...
Related Articles
  1. Top Broker Excuses For Poor Investments
    Brokers

    Top Broker Excuses For Poor Investments

  2. What Is Fiscal Policy?
    Economics

    What Is Fiscal Policy?

  3. Active Management: Is It Working For ...
    Mutual Funds & ETFs

    Active Management: Is It Working For ...

  4. Explaining The World Through Macroeconomic ...
    Options & Futures

    Explaining The World Through Macroeconomic ...

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center