The free rider problem: When consumers don't pay for shared public resources

Responsibility for providing public goods usually falls on the government.

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• The free rider problem is an economic concept of market failure that occurs when people enjoy a shared resource without having to contribute to it. 
• Private companies usually can't profit from providing public goods, so they're usually supplied by the government and paid for with tax dollars.
• Solutions to the free rider problems vary depending on how you expect consumers to behave.
• Read more stories from Personal Finance Insider.

There are things in life that you don't have to pay for. But that doesn't necessarily mean they're free, it just means the cost doesn't fall on you. If you can consume something — be it music on the street or a communal park — without having to pay for it, that makes you a free rider. 

When too many free riders consume a shared resource, it becomes difficult to maintain that resource, which is known as the free rider problem. 

What is the free rider problem?

In economics, goods are defined by two characteristics: excludability and rivalry. Excludability means that once the good is provided, you can exclude people from using it even if they didn't pay to use it. Rivalry means that one person's consumption of a good means that another person cannot consume that good, or their own use is detracted. 

The free rider problem is a market failure that occurs when a good is non-rivalrous and non-excludable, also known as a public good. Once a public good is established, "benefits are all privatized, cost is all socialized," says Tarun Kushwaha, a marketing professor at George Mason University. In other words, people can consume the good without having to pay their fair share in its upkeep.

Note: A market failure is a distribution of goods and services by the free market that can't maximize efficiency. 

Characteristic	Excludable	Non-excludable
Rivalrous	Private goods Clothing Food	Common goods Forests Fisheries
Non-rivalrous	Club goods Subscription-based news outlets Streaming services	Public goods Public radio Street lights

Because of the free rider problem, the costs of maintaining a public good heavily outweigh any profits that they might make, which discourages private companies from producing them through the free market. It usually falls upon the government to provide these goods, such as national defense or transportation infrastructure. These public goods can avoid the free rider problem because technically you are paying the government to provide these services — through taxes. 

However, in small-scale scenarios where a community is trying to provide a public good, it can be difficult to overcome free riders. 

Example of the free rider problem

As an example of a free rider problem, let's say the neighborhood association is taking donations to refurbish the neighborhood sidewalk. If they raise enough money, they can redo the entire neighborhood's sidewalks. This means that even if you don't donate, you'll still be able to enjoy the benefits of this neighborhood project. 

Unfortunately, if everyone comes to this realization, there's very little incentive for any individual person to donate. Assuming that everyone in your neighborhood acts solely in their self-interest, chances are, your neighborhood will be stuck with the old, cracked neighborhood until someone fixes it. Therein lies the free rider problem.

How to solve the free rider problem

The free rider problem is a common discussion for a reason: it's difficult to find a solution that keeps something non-excludable. "We have been trying to design systems forever to solve this problem, but it's not easy," Kushwaha says. 

Interestingly, solutions vary based on how you expect consumers to behave or, in other words, if you think people are selfish or altruistic.

Privatize public goods: In an economic view where people are inherently self-interested, you can't count on consumers contributing to a public good. If you believe this, Kushwaha says, "you can never have a completely free public good that is sustainable in the future forever. It eventually will fail," he says. 

One solution would be to privatize the public good and make it excludable or get rid of it entirely. For example, certain gated parks are only accessible to residents in the surrounding area. In our sidewalk situation, a homeowners association might just scrap the project and implement requirements for homeowners to maintain the section of the sidewalk in front of their house.

Appeal to altruism: In most economic models, we assume that consumers are rational, which means that they will make choices based on what's most beneficial to them. Though this assumption makes economic theory easier on larger scales, this isn't necessarily true in practice. People are not always rational in the way that economics assumes they are, which offers a way to combat the free rider problem. 

Instead of taking away the choice of whether or not to contribute to a public good, this approach encourages people to contribute because it's the right thing to do. In our sidewalk example, this might mean contributing to the sidewalk fund for no reason other than that you feel obligated to as a member of the community. 

Incentivise contributions: Offering an incentive to contribute to a public good lies somewhere between this spectrum of human behavior. An incentive gives potential free riders a reason to contribute even if they could enjoy a public good without it. 

These incentives don't necessarily need to have monetary value. Instead, they can be symbolic. Going back to our sidewalk example again, incentives might be offered in the form of your name listed on a plaque if you donate a certain amount. "You can essentially signal to your society, your peers, that, 'Hey, look, I am contributing to this good cause," Kushwaha says.

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