The stowaway problem: definition, example, solutions
- The free rider problem is an economic concept of market failure that occurs when people benefit from a shared resource without having to contribute to it.
- Private companies generally cannot profit from the provision of public goods, so they are usually provided by the government and paid for with taxpayers’ money.
- Solutions to free rider problems vary depending on how you expect consumers to behave.
- Read more stories from Personal Finance Insider.
There are things in life you don’t have to pay for. But that doesn’t necessarily mean they’re free, it just means the cost isn’t on you. If you can consume something – be it music on the street or in a communal park – without having to pay, that makes you a stowaway.
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 stowaway problem?
In economics, goods are defined by two characteristics: exclusivity and rivalry. Exclusivity means that once the good is provided, you can prevent people from using it even if they haven’t paid to use it. Rivalry means that the consumption of a good by one person means that another person cannot consume that good, or that his own use is diminished.
The free rider problem is a market failure that occurs when a good is nonrival and nonexcludable, also known as the public good. Once a public good is established, “the benefits are all privatized, the costs are all socialized,” says Tarun Kushwaha, professor of marketing at George Mason University. In other words, people can consume the good without having to pay their fair share in its upkeep.
Because of the free rider problem, the costs of maintaining a public good far exceed the profits they could make, discouraging private companies from producing them in the open market. It is generally the government’s responsibility to provide these goods, such as national defense or transport 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 defeat free riders.
How to Solve the Free Rider Problem
The free rider problem is a common discussion for a reason: it’s hard to find a solution that keeps something nonexclusive. “We’ve always tried to design systems to solve this problem, but it’s not easy,” says Kushwaha.
Interestingly, the solutions vary depending on how you expect consumers to behave, or in other words, whether you think people are selfish or altruistic.
Privatize public assets: In an economic view where people are intrinsically self-interested, you cannot rely on consumers contributing to a public good. If you believe that, Kushwaha says, “you can never have a completely free public good that is sustainable into the future forever. It will eventually fail,” he says.
One solution would be to privatize the public good and make it exclusive or get rid of it entirely. For example, some closed parks are only accessible to nearby residents. In our sidewalk situation, a homeowners association could simply abandon the project and implement requirements for homeowners to maintain the section of sidewalk in front of their home.
Call for altruism: In most economic models, we assume that consumers are rational, which means that they will make choices based on what is most beneficial to them. While this assumption facilitates larger scale economic theory, it is not necessarily true in practice. People are not always rational as economics assumes, which offers a way to combat the free rider problem.
Instead of removing 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, that could mean contributing to the sidewalk fund for no other reason than you feel obligated to as a member of the community.
Encourage contributions: Offering an incentive to contribute to a public good falls somewhere between this spectrum of human behavior. An incentive gives potential free riders a reason to contribute even though they might otherwise benefit from a public good.
These incentives do not necessarily need to have a monetary value. Instead, they can be symbolic. Going back to our sidewalk example, incentives could be offered in the form of your name on a plaque if you donate a certain amount. “You can basically signal to your company, to your peers, that ‘Hey look, I’m contributing to this great cause,'” Kushwaha says.