In economics, the free-rider problem occurs when those who benefit from resources, public goods, or services do not pay for them, which results in an underprovision of those goods or services. For example, a free-rider may frequently ask for available parking lots (public goods) from those who have already paid for them, in order to benefit from free parking. That is, the free-rider may use the parking even more than the others without paying a penny. The free-rider problem is the question of how to limit free riding and its negative effects in these situations. The free-rider problem may occur when property rights are not clearly defined and imposed.
Although the term "free rider" was first used in economic theory of public goods, similar concepts have been applied to other contexts, including collective bargaining, antitrust law, psychology and political science. For example, some individuals in a team or community may reduce their contributions or performance if they believe that one or more other members of the group may free ride.
The economic problem with free riding
Free riding is a problem of economic inefficiency when it leads to the under-production or over-consumption of a good. For example, when people are asked how much they value a particular public good, with that value measured in terms of how much money they would be willing to pay, their tendency is to under report their valuations.
Goods which are subject to free riding are usually characterized by the inability to exclude nonpayers. This problem is sometimes compounded by the fact that common-property goods are characterized by rival consumption. Not only can consumers of common-property goods benefit without payment, but consumption by one imposes an opportunity cost on others. This will lead to overconsumption and even possibly exhaustion or destruction of the common-property good. If too many people start to free ride, a system or service will eventually not have enough resources to operate.
Government is the primary agency that societies utilize to address the free-rider problem. Regulation is a form of action taken by governments to resolve free-rider problems to prevent environmental degradation or excessive resource use. Practical acts include compulsory participation (taxation) or a form of regulation and linking the public good to a desirable private good (getting people to pay voluntarily). A theoretical solution is the Lindahl tax, which asks for individuals to pay in proportion to the benefits they derive from the public good. A common objection to this proposal is that people will not reveal their preferences, and will prefer to 'free ride'. Governments have imposed taxes when not enough people have voluntarily paid for a public good or service, and some governments have turned a public good into a private one.
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