Loading the player...

What is the 'Free Rider Problem'

The free rider problem is a situation where some individuals consume more than their fair share or pay less than their fair share of the cost of a shared resource. It 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 can be obtained through free riding.

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 a good's supply if enough people jump on board with the mentality. For some people, a free ride means 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.

How Does the Free Rider Problem Occur?

Free rider problems occur for two reasons. First, because there is non-excludability, which means that when providing something that's supposed to be for everyone, there's no way to stop anyone from using it. Secondly, if the use of a good doesn't reduce its availability for others, people won't stop using it. 

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 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 labor union.

Behavioral Tendencies and Tragedy of the Commons

On a deeper level, free riding reflects a behavioral tendency — the tendency to evade responsibility or work when the effects of doing so are minimal or when the adverse effects do not have an immediate and direct impact. This tendency is one of the forces leading to what was introduced by William F. Lloyd in 1833 and developed 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.

An original 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 more substantial amount, ultimately resulting in the collapse of an industry that had existed for hundreds of years.

Are There Any Solutions to Free Riding?

Because the government is the primary agency that people use to address free riding, it is the first place to go to curb the problem. Many governments start regulating goods and services to resolve the issue. Other solutions include taxation so people will be forced to pay for their consumption. Another option includes turning public goods into private ones, so people will be sure to pay their fair share. Free riders can also be curbed by soliciting donations in places like museums and galleries. Sometimes, people won’t mind giving a small donation for using a service. 

RELATED TERMS
  1. Common Resource

    A common resource is a resource, such as water or pasture, that ...
  2. Public Good

    A public good is a product that one individual can consume without ...
  3. Free Market

    The free market is an economic system based on competition, with ...
  4. Private Good

    A product that must be purchased in order to be consumed, and ...
  5. Dread Disease Rider

    A dread disease rider gives a percentage of the insurance death ...
  6. Market Failure

    Market failure is the situation in which there is an inefficient ...
Related Articles
  1. Financial Advisor

    Living And Death Benefit Riders: How Do They Work?

    Find out how these different riders work, and which type is right for you.
  2. Financial Advisor

    How Accelerated Benefit Riders Fill Insurance Gaps

    Accelerated benefit riders have become the new darlings in the financial marketplace. Here's why.
  3. Financial Advisor

    Should You Buy A Life Insurance Disability Rider?

    Does it make sense to pay an additional cost for a waiver of premium rider on a life insurance policy?
  4. Insurance

    How Long-Term Care Riders on Life Insurance Work

    What is the difference between Accelerated Death Benefit for Chronic Illness and Long-Term Care Riders offered on life insurance policies?
  5. Insurance

    Are return-of-premium riders worth it?

    Find out if this policy coverage will put money in your pocket, or cost you in the long run.
  6. Personal Finance

    Get A Free Ride From Credit Companies

    Find out how to make your credit cards work for you - not against you.
  7. Taxes

    Could The Fair Tax Movement Ever Replace The IRS?

    Although many taxpayers would love to see the IRS abolished, only a handful of thinkers have come up with any sort of viable replacement plan. The Fair Tax is one such idea that has continued ...
  8. Retirement

    Variable Annuities with Guaranteed Benefit Options

    Guaranteed benefit riders protect variable annuities against a market downturn, but they also make an already expensive product even costlier.
  9. Insurance

    Using Life Insurance To Make Charitable Donations

    Your life insurance policy can be a great tool for charitable giving. Find out how.
RELATED FAQS
  1. What are the main arguments in favor of the privatization of public goods?

    Learn about the main arguments why the task of delivering public goods should be the responsibility of companies under private ... Read Answer >>
  2. How is the principle agent problem manifested in the government?

    Learn more about the principal-agent problem and challenges this problem may create in the relationship between government ... Read Answer >>
  3. What are some examples of inelastic goods and services that are not affected by the ...

    Find out how the laws of supply and demand function for goods and services considered highly inelastic, including goods not ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center