Updated Jan 3, 2023 The fact that public goods are non-excludable and non-rival often leads to the so-called free rider problem. The free rider problem describes a situation where people can receive the benefits of a good without paying their fair share or anything at all. However, this problem does not affect all public goods. In the following paragraphs, we will learn when the free rider problem occurs and how it can be fixed. We’ll use a simple example to walk through the process: fireworks. Fireworks displays are a public good because they are non-excludable (nobody can be prevented from looking at the sky) and non-rival (one person looking at fireworks does not make it less enjoyable to someone else). Alright, so let’s get started. The free rider problem occurs when people can benefit from a good without paying their fair share or anything at all. It generally occurs with shared resources, such as public goods, that have to be actively produced or maintained. That means the free rider problem does not affect basic public goods such as a beautiful sky full of stars, because nobody has to place the stars in the sky, to begin with. We’ll see why this matters in just a second. For now, all you need to know is that the free rider problem occurs when people can use public goods that were produced by someone else, without paying for it. To illustrate this, let’s revisit our fireworks example. Now, assume that a private company, we’ll call it BigBang Inc., considers producing fireworks to put on a display to celebrate Independence Day on 4 July. To pay for the fireworks, the owner wants to sell tickets to the event, which will take place in Pyroville. However, most Pyroville residents probably wouldn’t buy a ticket because they can just stay at home and see the fireworks from there, without spending a dime. In other words, they are tempted to free ride. The free rider problem is considered a market failure that typically arises because of positive externalities. That means the production of the public goods usually confers an external benefit to the potential free riders. However, the producers ignore that benefit, because they cannot profit from it themselves. As a result, they produce less than the socially desirable output because it is not privately profitable for them. That, in turn, leads to an undersupply, and the free market fails. In our example, the most rational decision from the perspective of BigBang Inc. is to call off the event. After all, it is unlikely that people would pay for tickets if they can just enjoy the show from their own front yard. Given these circumstances, the firm has little to no chance to cover its cost or even make a profit. From a business perspective, there is no reason for BigBang Inc. to pay for people’s entertainment if it gets nothing in return. Thus, even though people would love to see a fireworks display, the free market fails to provide it, because nobody is willing to pay for it. The solution to the free rider problem is quite simple. The government has to provide public goods using taxpayer money. The idea behind this is that the government can redistribute some of its tax revenues to provide shared resources that provide a benefit to society, but would otherwise not be produced by the free market. That means it can use a portion of the taxpayer money to provide public goods itself or pay private producers to supply them. For example, if the local government of Pyroville decides that the total benefits of a fireworks display exceed its cost, it can use some of its tax revenues to pay BigBang Inc. to supply the fireworks on 4 July. That way, the firm gets paid for its work, the locals get to enjoy the fireworks, and everybody is happy. The fact that public goods are non-excludable and non-rival often leads to the free rider problem. That means people can receive the benefits of a good without paying their fair share or anything at all. This situation prevents the private market from supplying shared resources because doing so would not be profitable. However, the government can fix this problem by providing public goods using tax revenue.The Free Rider Problem
Market Failure
The Solution to the Free Rider Problem
Summary
Sources
(2nd ed., revised ed.) Andover: Cengage Learning. 223-224.
Microeconomics