Free Rider Problem

Posted in Finance, Accounting and Economics Terms, Total Reads: 478
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Definition: Free Rider Problem

A free rider in an economic world is defined as a consumer who utilizes/consumes more than the fair share of the public resource i.e. pays lesser than their fair share of the cost of the resource. Usually free rider effect is counter-balanced in a free market, but if enough number of people enjoys the privilege without paying for the goods/service provided, this may result in diminished quality of the goods/service in the market.


Since a public good is defined to be non-excludable (no one can be stopped from consuming the good) and unrivalled (consuming the good, does not reduce the amount available to others), it is more susceptible to the free rider problem. Examples of public goods may be national defense, street lighting, etc.


Free rider problem can be resolved by using the following methods:

• Taxes – Treating the public as consumers, the cost of the goods/service is shared among all the consumers.

• Privatizing a public good – Erecting barriers to usage, such as usage fee, entrance fee, etc. But this approach makes a public good excludable; hence it is no more a public good.

 

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