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Free Riders

Suppose that an area has a terrible mosquito problem. An enterprising young man decides that it would be fairly cheap to spray the area ponds and swamps to control mosquitoes. (In most species of mosquitoes, the larval stage is spent living in water, but breathing air.) He also reasons that most of the people would value a reduction in mosquitoes a great deal. However, even if his assessment of the situation is correct, an attempt to form a business will run into a serious problem, the problem of the free rider.

To see the problem of the free rider, consider the options open to a "customer" of the mosquito-reduction service who is asked to pay $25.00. If he pays $25.00, he will get a reduction in mosquitoes (if enough other people also pay to make the service financially viable). If he refuses to pay, he will still get the same reduction in mosquitoes (again assuming that there are enough other people who pay so the service is financially viable). Once the service is produced, it cannot be withheld from people who do not pay for it. Mosquitoes attempt to bite the first target they find, and are not likely to bite only those who do not pay businessmen who are trying to kill them. Given the options, each person is likely to reason that his $25.00 is unimportant relative to the total amount needed to make the enterprise successful, and thus the results will not depend on his contribution. However, if everyone thinks this way, the enterprise cannot come into being. Hence there is a paradox: though people may want the service a great deal, and though it may be cheap to produce, it may be unprofitable to produce.

The mosquito control program is an example of a public good. Public goods have two characteristics: they are nonexcludable, which means that it is not possible to exclude those who do not pay for the good or service, and they are nonrival, which means that one person's use of the good or service does not diminish the amount available to others. In addition to mosquito control, the problem extends to police protection and national defense, lighthouses, the development of knowledge, and television.

There are a variety of ways to cope with the free rider problem. Sometimes there are alternative ways to provide a service that makes exclusion possible: window screens are a substitute, though hardly a perfect one, for spraying mosquitoes; and cable and pay TV are substitutes for broadcast TV. Both radio and television broadcasts are public goods. In the early days of radio, giving away the broadcast was seen as a way to sell radio sets, but soon an entrepreneur discovered that although one could not sell the programming to the audience, one could sell the audience to advertisers, and this sale of the audience is the basis for network television.

Another way to overcome free rider problems is through social pressure. Community leaders recognize a problem and organize to solve it. Those who do not cooperate can be ostracized or in some way their relations with the rest of the community can be adversely affected. If some of those bothered by mosquitoes in the previous example mutually agree to form an association to solve the problem, those who do not voluntarily contribute may find life as an outcast unpleasant. The $25.00 is contributed not to buy mosquito control, but to buy social acceptance. The way a voluntary group can solve the free rider problem is by changing what the payment buys.

An alternative to the social pressures of voluntary groups is the coercion of the government. The government could provide a mosquito-control program, paying for it by taxing citizens. Even when voluntary organization is possible, it may be much easier (and require fewer resources to collect the money necessary for the program) to use the power of the government to provide public goods. In addition, governments usually will not allow private groups to provide services that have force as part of the product, such as police protection, the court system, or national defense, because the private groups would then have the potential to expand and threaten the government itself.

You might notice that the logic involved in the free rider problem is the same as in the problem of the commons and the prisoners' dilemma. In fact the free rider problem can be seen as an extension of the prisoners' dilemma from a two-person game to a multi-person game. The best solution as far as the group is concerned involves cooperative behavior. However, each individual can be made better off if he and he alone can cheat on the cooperation. Because everyone has this incentive, there is a strong tendency for cooperation to break down unless added incentives (such as force or social ostracism) are introduced into the payoffs.

The free rider phenomenon is not always a bad thing. For example, it is the free rider phenomenon that keeps large numbers of sellers from colluding and charging higher prices to consumers. In this case, it prevents the formation of subgroups from working against the interests of the whole group.

When discussing efficiency, we considered the case in which a bundle of resources had three possible uses, one valued at $25, one at $22, and one at $20. We concluded that for a market to be efficient, it had to send those resources to the place where they were worth $25. Suppose, though, that this $25-use is a public good, so the seller will not be able to collect the value that people get from the product. Will the resources go to the most valuable use or will we have an inefficient use of resources?

We now turn from free riders to "free" resources.

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Copyright Robert Schenk