16. Free-Riders

Note: This post is the sixteenth in a series. Click here for the full listing of the series.

In economic terms, a 'free rider' is a person who gets receives a benefit without contributing to the cost of generating of that benefit. The term derives from the notion of someone riding public transit without paying a fare. They are 'riding for free'.

In Mancur Olson's 'The Logic of Collective Action' which I covered in the last post, his idea was that as any group trying to generate a benefit grows larger, the temptation to free ride grows, and that rational self-interested people would not choose to cooperate in a group of this nature unless they were able to get some specific benefit from their cooperation (beyond the public good that their cooperation creates).

The Wikipedia entry offers the following example and possible solution,

"Suppose there is a street, on which 25 people live, and which suffers from a litter problem. A weekly street-cleaning service would cost $2,500 annually. Suppose that each person is prepared (i.e., able and willing) to pay $100 or more for the benefit of a cleaner street.

If the service is engaged, everyone will benefit. However, it is possible that some people on the street will refuse to pay, anticipating that the service will be undertaken in any event. Despite the fact they may be prepared to contribute $100, they will claim that they are not prepared to pay, and instead hope that others in the street will pay for the system anyway, and they receive the benefit for no personal expense.

As a result, it may happen that no system will be installed, an example of market failure. This is despite the fact that allocative efficiency would be improved.

...

One common solution to the problem is to gather the 25 participants and make them behave like one customer, so the decision is reduced from 25 independent decisions to one. A vote can be taken, but if the answer is yes, everyone will be forced to pay regardless of their individual support. This is why public services such as military defence and police service are almost exclusively provided by governments."

Note that the failure of a collective activity due to free rider incentives is a form of Prisoner's Dilemma, where people have an incentive to defect (free-ride) regardless of whether the other group members are cooperating or free-riding.