What is Free Rider Problem?

1255 reads · Last updated: December 5, 2024

The free rider problem is the burden on a shared resource that is created by its use or overuse by people who aren't paying their fair share for it or aren't paying anything at all.The free rider problem can occur in any community, large or small. In an urban area, a city council may debate whether and how to force suburban commuters to contribute to the upkeep of its roads and sidewalks or the protection of its police and fire services. A public radio or broadcast station devotes airtime to fundraising in hopes of coaxing donations from listeners who aren't contributing.

Definition

The free rider problem refers to the burden on shared resources caused by their use or overuse, where users do not pay their fair share or do not pay at all. This phenomenon is common in the use of public resources.

Origin

The concept of the free rider problem originates from economics and public policy, first widely discussed in the mid-20th century. As public resources increased and users diversified, this issue became more prominent.

Categories and Features

The free rider problem can be categorized into several types: 1. Public goods free riding, such as public broadcasting; 2. Infrastructure free riding, such as the use of roads and bridges. Its features include non-exclusivity and non-competitiveness of resources, leading to a lack of motivation for individuals to pay.

Case Studies

A typical case is public radio stations in the United States, which rely on listener donations to operate, yet many listeners do not contribute. Another example is urban infrastructure like roads and bridges, where suburban commuters often use these facilities without directly paying for their maintenance.

Common Issues

Investors might misunderstand the impact of the free rider problem, thinking its effect on resources is negligible. However, in the long term, this can lead to overuse and degradation of resource quality.

Suggested for You

Spot Rate

The spot rate is the price quoted for immediate settlement on an interest rate, commodity, a security, or a currency. The spot rate, also referred to as the "spot price," is the current market value of an asset available for immediate delivery at the moment of the quote. This value is in turn based on how much buyers are willing to pay and how much sellers are willing to accept, which usually depends on a blend of factors including current market value and expected future market value.While spot prices are specific to both time and place, in a global economy the spot price of most securities or commodities tends to be fairly uniform worldwide when accounting for exchange rates. In contrast to the spot price, a futures or forward price is an agreed-upon price for future delivery of the asset.

Balance Of Payments

The balance of payments (BOP), also known as the balance of international payments, is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year. It summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.

Oversupply

Oversupply, also known as excess supply, occurs when the quantity of a good or service available in the market exceeds the quantity demanded by consumers. This situation typically results in a decrease in the price of the good or service, as suppliers reduce prices to clear excess inventory or minimize losses.

Law Of Supply And Demand

The Law of Supply and Demand is a fundamental economic principle that describes the relationship between the availability of a product (supply) and the desire for that product (demand). Specifically:Law of Supply: All else being equal, an increase in the price of a good will result in an increase in the quantity supplied. Conversely, a decrease in the price will result in a decrease in the quantity supplied. This occurs because higher prices can lead to higher profits, attracting more producers to the market.Law of Demand: All else being equal, an increase in the price of a good will result in a decrease in the quantity demanded. Conversely, a decrease in the price will result in an increase in the quantity demanded. This happens because higher prices reduce consumers' purchasing power or willingness to buy.

Supply Curve

The supply curve is a graphical representation that shows the relationship between the price of a good or service and the quantity that producers are willing and able to supply at various price levels. Typically, the supply curve slopes upwards from left to right, indicating that as the price increases, the quantity supplied also increases.

Law Of Supply

The Law of Supply states that, all else being equal, an increase in the price of a good or service will result in an increase in the quantity supplied, and a decrease in the price will result in a decrease in the quantity supplied. This principle reflects producers' response to price signals, where higher prices typically lead to higher profits, thereby incentivizing producers to supply more.