Free Rider Problem

What is the "free rider problem"? Here's an example we're all familiar with. You have a group assignment in class, and there's always that one kid who doesn't do any work but gets the same grade as you. That's a "free rider problem." It's a term used to describe when someone gets the benefit of a good or service without incurring a cost for it. That may not seem like a big deal, but let's take something more dramatic: asteroid protection -- paying to protect the Earth from an asteroid. Though an asteroid hitting the Earth is a low probability event, the results can be devastating.

So would you pay for asteroid protection? Let's think through it. First, asteroid protection is going to protect the whole Earth so even if you didn't pay for the protection, you'd still be protected, and, second, your payment is probably not going to make a difference between a successful and an unsuccessful defense. Given those two facts, you don't really have an incentive to pay for it.

So there are really only two cases to consider -- either enough other people pay so that you are protected or enough other people don't pay so that you aren't protected. Either way, whether you pay or not doesn't determine whether or not you get protection. Hence, the temptation to free ride -- get the protection without paying for it. But if lots of people free ride, then asteroid protection isn't funded, no one is protected, and we have a market failure. There are specific types of goods and services prone to the free rider problem -- goods and services we call "public goods."