Question

What is the free rider problem?

Short answer

The free rider problem is an economic concept where individuals or groups benefit from the efforts and resources of others without contributing themselves, often resulting in under-provision of goods or services and potential market failures. This is particularly relevant to public goods, which are characterized by non-excludability and non-rivalry. An example of the free rider problem is the construction and maintenance of a public park. If some individuals decide not to contribute financially, others may also withhold or reduce their contributions, leading to insufficient funds for the park's construction or maintenance and a suboptimal outcome for the community.

Step-by-step solution

Definition of the Free Rider Problem

The free rider problem is an economic concept that occurs when an individual or a group of individuals benefits from the efforts and resources of others without contributing to those efforts or resources. This typically leads to an under-provision of goods or services and can result in market failures.

Public Goods and the Free Rider Problem

Public goods are goods or services characterized by non-excludability and non-rivalry. Non-excludability means that it is not possible to prevent individuals from consuming the good, even if they have not paid for it. Non-rivalry means that one person's consumption of the good does not diminish its availability or quality for others. Due to these characteristics, people may have an incentive to become free riders by benefiting from public goods without contributing to their provision.

Example of the Free Rider Problem

Let's consider a neighborhood that decides to invest in a public park. Building and maintaining the park requires funds from the residents, but once the park is built, it is difficult, if not impossible, to prevent individuals who did not contribute to the funding from enjoying the park. Consequently, some individuals may decide not to contribute to building and maintaining the park, hoping that others will cover the expenses. This may cause some residents to reduce or withhold their contributions, which can lead to insufficient funds for the park's construction or maintenance, resulting in a suboptimal outcome for the entire community. This is an example of the free rider problem.