What it is: A free rider is someone who benefits from a product at no cost. It appears in public goods because people are free to benefit from goods without paying for them. When you consume it, it does not reduce the benefits received by others. Also, you can’t exclude other people from using it either.
In Indonesian, we call it a free rider or free rider.
Free rider example
You can find many examples of free riders around you, especially for items that are freely available to everyone.
Street lights . You and your neighbors spend some money to buy street lights. Once installed, the lamp is useful for local residents. For example, children can play in at night.
Although it is beneficial for local residents, outsiders who pass through the area also get the same benefits even though they do not participate in joint buying. Likewise, when your friends visit from out of town, they also benefit from it.
Wikipedia . Hundreds of millions of people use it and it’s free. Even if they don’t pay, they can also benefit from the information on the site.
National defense also gave rise to free riders . Taxpayers or not, all get the same protection from the police and the army. Of course, when rescuing you on the road from a crime, the police won’t ask you whether you paid taxes or not before helping you.
Other examples are:
- Lighthouse – useful for local sailors and ships. Likewise, ships from other regions or countries also benefit equally, even though they do not contribute to maintenance costs.
- Fireworks – spectators, whether they pay to attend the festival or not, can enjoy the same entertainment.
- Public parks – they are financed with public money (taxes) to pay wages for cleaning workers, landscaping, land acquisition, and so on. And, everyone can access it, whether they pay taxes or not.
Free rider in public goods
Free riders often appear for public goods. There are two reasons why public goods give rise to free riders.
- Its consumption by one party does not reduce its availability to the other party.
- Individuals cannot exclude others from consuming or using public goods.
For these two reasons, property rights cannot be clearly defined and applied. Individuals can take advantage of public goods without paying for them.
Some people are trying to get a free ride on the back of others buying public goods. Whether paying or not, all can benefit from it. Finally, it generates little incentive for people to contribute to providing it.
Free rider impact
The free rider problem is an example of a market failure for public goods. People benefit from resources, goods, or services even if they don’t pay for them. That raises some problems.
First , the consumption of goods becomes very excessive. People can use and get the same benefits from the consumption of goods. They will act to maximize their own utility thus leading to excessive consumption.
Second , goods or resources are not economically feasible to produce. Businesses do not want to provide public goods because they are not profitable. They do not earn enough income to cover production costs. The more people who use it for free, the smaller the income. For this reason, manufacturers have no incentive to provide them.
For this reason, the government takes part in providing public goods. Although economically unprofitable, public goods provide positive benefits to society (positive externalities). To finance its provision, the government collects taxes.
Overcoming free riders
There are several solutions to overcome the free rider problem . In the case of the street lighting above, residents can ask for donations for motorists passing through the area. It reduces the burden for repairs at a later date or to replace some of the donations from residents.
Collect taxes. Governments can collect taxes and use them to provide public services. For example, by requiring everyone to pay taxes, the government can finance national defense. And, if everyone paid taxes, there would be no free riders .
Excludes nonpayers . Manufacturers can prevent nonpayers from using the product. In other words, we turn public goods into club goods . Cinema is a good example of this case. You can’t prevent other people from watching a new movie, but for that, you have to pay as well as everyone else.
Another example is the road. When the road has been congested, we can turn it into a toll road and only allow those who pay.
Likewise with museums. If previously it was free for everyone, then the owner can charge an entrance fee.
User contributions. Manufacturers provide a common platform where users (beneficiaries) contribute to each other to develop the platform. Wikipedia is an example. The owner provides a platform where everyone can write new articles on the page and other visitors can read them. Of course, it reduces the cost of providing the platform.