The Free Rider problem occurs when there is a good (likely to be a public good) that everyone enjoys the benefits of without having to pay for the good. It is the failure of individuals to reveal their real preferences for the public good through their contributions. For example, what this means is that no one will want to contribute towards the building of a bridge because they know that even if they don’t participate in paying for the bridge, someone else will, and the bridge will get built anyway.
This situation leads to the underproduction of such goods. Since these goods are non-rival, it means that they cannot exclude other people from consuming them. For example, you cannot prevent anyone utilizing the benefits of a street lamp, even though they haven’t paid for it.
Public goods have two characteristics that set them apart; they are non-rival and non-exclusive. Private firms have no incentive to produce such goods since they can’t make everyone pay for them.
Wikipedia is another example of the Free Rider problem – few people contribute (financially or otherwise) but everyone gets to use it.
Example of The Free Rider Problem
There is a project to build a bridge that would benefit 50 people and each one of those 50 people is only willing to pay $100 towards the project. However, the bridge costs only $2,000 to build. This means if everyone contributed $100, there would be an excess of $5,000.
What ends up happening is that every individual tries to lower they value of the bridge. They know that they would get to use the bridge even if they didn’t pay the same amount as the next person. This goes on till everyone decides to not contribute to the project. This is known as the free rider problem.
Solutions to Free Rider Problem
One solution is to treat all beneficiaries as one consumer and then divide the cost equally. For example, if we have a public good like national defense, we can get everyone to pay for it by using tax revenue to pay for the national defense budget.
2. Soliciting Donations
This can be effective for services that a low cost. People often don’t mind making a small donation towards a garden or a museum. Not everyone will pay but the generosity of the people that will pay will make up for the free riders.