The Free Rider Problem
This problem occurs when a person benefits from a good without paying for the use of it. The problem is associated with Public Goods.
Would you pay for a good if you could obtain the benefits for free? Probably not!
How do you solve this problem?
As public goods are non-excludable the private market is unable to provide them. However, this problem can easily be solved by the government levying taxes on citizens and providing the good with the revenue raised.
In this way everyone is paying for the use of the good and everyone is equally enjoying the benefits.
Example: Local Council taxes to maintain local parks
and tidy streets.
In this way everyone is paying for the use of the good and everyone is equally enjoying the benefits.
Example: Local Council taxes to maintain local parks
and tidy streets.
The fireworks example illustrates the Free Rider Problem. Even if the fireworks show is worth €10 to each person, arguably few people will pay €10 to the entrepreneur. Each person will seek to “free ride” by allowing others to pay for the show, and then watch for free from his or her backyard. If the Free Rider Problem cannot be solved, valuable goods and services — ones people otherwise would be willing to pay for — will remain unproduced.