The Free Rider Problem and the Tragedy of the Commons - Online Tutor, Practice Problems & Exam Prep

Public goods, characterized as non-rival and non-excludable, face the free rider problem, leading to under-supply in private markets. For instance, a fireworks show valued at $1,000 by townsfolk may not be funded due to individuals seeking free access. Governments often intervene by taxing residents to provide such goods when the marginal benefit exceeds the marginal cost. Conversely, common resources, which are rival but non-excludable, can lead to overuse, exemplified by the tragedy of the commons, where lack of property rights results in depletion of resources like grazing land.

Free Rider Problem

So like I said, common resources and public goods are going to need help, right? They don't work just by themselves, and now let's see why that is. So first, let's talk about the problems with public goods. Public goods are going to suffer from what we call the free rider problem, alright? Public goods, if you remember, were the ones that were non-rival and non-excludable. And we're going to see on this page, we're going to be talking about non-excludable goods. Right here, we're talking about public goods, below, we're going to talk about common resources. Both of them are non-excludable, and that's where the problems come in. Okay, so first, public goods suffer from the free rider problem okay, and we're going to see that in a private market, public goods are going to be undersupplied. Okay. If we just leave it up to the private market to supply these goods, it's not going to happen, right? They're going to be undersupplied, and we're going to see an example of why. So we're going to talk about free riders and the free rider problem, right? A free rider is a person who receives the benefit of a good without paying for it. Okay? And I'm sure you guys have all been dealing with free riders throughout your college career, right? Every time you have a group project, guess who ends up doing all the work, right? Probably you, and they're all just free-riding. They're like, hey, that person does really good work, and I know that even if I don't do anything, they're going to do all the work, right? So they're looking for that free ride. They're not going to put in any effort, but they want to get that high grade. Cool? So let's go to this example of a firework show. We've talked a little about how a fireworks show could be a public good, right? It's kind of tough to exclude someone from seeing a fireworks show, right? Because, you know it's up in the sky, what are you going to build a giant wall to keep people from seeing it? It's going to be pretty difficult, right? And it's so it's non-excludable and it's also non-rival, right? Because me watching the fireworks doesn't stop you from also enjoying the same fireworks. Cool? So we'll see fireworks as a public good here. So in our example, we've got Dynamite Bill. He loves to put on fireworks shows and he wants to provide this show for a small town for the price of $500, right? He wants to put up a fireworks show for a price of $500 and in the town, we've got 100 people living in town, and they would each value this show, let's say they would say well I would probably pay like $10 for that show, but when they think about it they're like, you know what? If I just stand outside my house, I could see the show anyway, so why would I buy a ticket? So what we're going to see is that the townsfolk are going to try and get a free ride here, right? Instead of saying that they would value this show at $10, they would probably undersell it. They'd be like, fireworks, I don't really care for fireworks. It's not really my thing, but in their head they're like, oh man. I really hope there's a fireworks show, right, but publicly, right, they're trying to get that free ride. If they can see the fireworks for free and then keep that money, they're better off, right? They can spend that money on something else and get a fireworks show. Life would be good, right? So the townsfolk would probably say that they don't care about fireworks. They wouldn't pay for a fireworks show, right? They would likely pay $0. That's their kind of mentality here. So what do we see? We see that the free rider problem prevents the private market from supplying these goods, right? Because what do we see? These people all value the show at $10, right? They truly value it at $10, so we see that the 100 people times the $10 they value it, we can see there's like this $1,000 benefit that could happen if this fireworks show went on, right? They all get this $10 worth of satisfaction, and Dynamite Bill wants to put the show on for only $500. What a steal, right? There's all this value that could be created, but since people don't want to pay for something that they could probably get for free, they're not going to want to pay. So this wouldn't happen, right? Dynamite Bill's not going to be able to sell the tickets to get this to happen because people want to get that free ride. So what happens with these public goods is generally that the government gets involved when we're dealing with public goods, and they're going to provide the public good so long as that marginal benefit from the good is greater than or equal to, right, it has to be at least greater than or equal to the marginal cost of providing that good. So let's see in this example, what could the government do? The government could come in and put on a small tax on all the residents, right? There are 100 residents there and there's a $500 that they need for the show. So the government could come in and tax all 100 residents $5, right? If every resident paid $5 in tax, the government would raise the $500, right? So the government can force this payment, right? They see that there's this benefit to the fireworks show to all the citizens, they put a tax of $5, they raise the $500 from the citizens, and they hired Dynamite Bill, right? So in this case, the citizens were able to get that value, they still value it at $10, right? They're still getting more value than they put into this tax and Dynamite Bill is going to put on the show, right? So the government stepped in here and made it possible for this public good to be available. So what we're going to see is that generally when we have public goods, the government is going to be the one providing them, alright? Or making them able to be provided. Alright? Cool. But that's not to say that all public goods have to be some sort of situation like this. We'll see some examples, especially in small settings, where we'll have public goods that the government's not involved, but the main takeaway here on the grand scale, governments are generally going to provide public goods and it's going to be this qualification as long as the benefit exceeds the cost of the good. Cool. So that is how we see the free rider problem affecting public goods. In the next video, let's talk about common resources and the tragedy of the commons. Cool, let's do that now.

Tragedy of the Commons

Alright, guys. I haven't told you this before, but I secretly have a passion to become a screenplay writer. Okay? I love live theater and this is my true passion, to create live screenplays. I've kind of got a synopsis for one I've been playing out in my head, and I kind of want to relate it to you and see what you guys think. Alright, so let's talk here about common resources and the tragedy of the commons. Okay, this is going to be the theme of my play.

So the tragedy of the commons, remember when we were talking about common resources, these were things that were rival and non-excludable, right? So when something's rival, that means if I consume it, you can't consume the same thing, right? A great example was the fish in the ocean, right. Fish in the ocean, so if I go out and catch a fish out there in the ocean, you can't catch the same fish, right? But no one can keep us from going out in the ocean and catching them. That's why they're non-excludable. So you can imagine over time, the fish are going to be depleted, and that's what we see with common resources. Common resources tend to be overused, right? So let me go ahead and dive into my 5 act play. This is a tragedy called Macdeath. Okay, Macdeath by Brian.

Act 1, enter Johnny Clutch. Johnny Clutch is moving to this small paradise town of Small Town. Johnny Clutch is a shepherd, he's arriving in Small Town with his two sheep because he hears of this wonderful utopian green, grazing land where the grass is so fruitful and full of nutrients that the sheep are so happy to live here. So Johnny Clutch arrives in Small Town with his 2 sheep, high hopes for his wonderful life as a shepherd.

Act 2, Johnny brings his sheep there, and his sheep are grazing in this wonderful pasture, eating this wonderful grass, and growing and becoming big, strong sheep with beautiful, beautiful wool, making the best wool in the world. And Johnny goes on shearing his sheep and he's making tons of money selling this special wool, right, from the Small Town pastures.

Act 3, enter other people. They hear of all these great profits in Small Town, all the great profits of all the shepherds here in Small Town and people start moving to Small Town because they hear about this grazing land and how great it is. So more people come to graze their sheep in Small Town.

Act 4, there are so many sheep. We see the field full of sheep, there are hundreds and hundreds of sheep all eating the grass, they're just eating and eating and eating, and you see all this grass, it's not there anymore. It's starting to become barren. The grass has been eaten away, you just see dirt patches everywhere, the fields have become barren.

Act 5, the sheep die. And because the sheep die, everybody dies. What do you think? Pretty good, right? This is a pretty good tragedy that I've just unfolded for you. Well, this is the tragedy of the commons, right? What we see is that when we have these common resources, in this case, the common grazing land, there was this grazing land that was available for everybody to use. Since it was available for everyone, no one had a personal reason to not use it. So Johnny saw his personal benefit from bringing his sheep there and grazing. And as Johnny made more money, maybe he bought more sheep and kept grazing. He saw all this potential he had from using this grazing land. But what ends up happening is that it gets overused. Since there's nobody stopping Johnny from using the grazing land or anybody else, everyone's going to use it as much as they can until it's depleted. And that is the tragedy of the commons, they're going to be overused.

So what's the moral of the story here? Why did this arise? The tragedy of the commons arises because there is an externality that we're not taking into account, right? And the externality is the cost of this field, right? The cost to the field, the grass is no longer there, there's this cost being posed on society when your sheep is grazing. Every time your sheep grazes, it takes away from this resource, it causes this externality. So how could we have solved this problem? Remember when we talked about externality, it all came down to property rights. In this case, there are no clearly defined property rights, right. This field is just common land that anybody can use, but let's say the field had belonged to Johnny. If Johnny owned the field, he would have known to only graze so much. He would have made sure to keep only so many sheep on the field so that he could keep earning profit for a long time. But it doesn't have to be Johnny that owns the field, right? It could be some other landlord, some landlord owns the field and Johnny pays a fee to use it. Now it's in the landlord's best interest to take care of the field because he makes money based on people being able to use the field. So if there was no grass there, he would stop making money, so he's going to make sure to maintain the field and also keep the quantity of sheep low enough that it doesn't get depleted. So let's go ahead and see this tragedy of the commons on the graph, right, we've got the price and the quantity of sheep there and we've got our downward demand, right D1 and S1, where S1—this only has the private cost. When we talked about externalities, we talked about the private cost, which is just the supply curve that we're used to, right? We're used to this supply curve which is kind of just the cost of raising the sheep, right? Yeah, those costs to the shepherd himself. But we see that there's this cost to society as well. When there's these external costs, we have a negative externality, and it causes us to actually have our real, marginal social cost. The cost to society is actually to the left of this private cost. So what ends up happening is without considering this.externality, we end up at this quantity of sheep, right, let's focus on the quantity here. This quantity of sheep, sorry, quantity and I'm going to put the.quantity of the market. The market will find this equilibrium when they don't think about this externality. But truly, the real efficient equilibrium when we consider all costs to society would have been downstairs. So what we see is that we're overproducing, right, we have too many sheep, there's too many sheep on the pasture, the market quantity is more than our efficient quantity. We have too many sheep and that is what's causing the common resource to be depleted. If we had been taking into account this cost to the field, we would have had fewer sheep on the field.

Cool. So let me know what you think. Maybe I should become a screenplay writer, maybe, I don't know, maybe I'll just finish this course with you guys. Let's try that first. Alright, let's move on to the next video.

Making customers pay per use of a public good is inefficient because:

• A. It results in deadweight loss
• B. MC of the use of the public good once provided is zero
• C. It uses willingness to pay as a measure of preferences
• D. Both (a) and (b)

In the case of a shared pasture, what is the rational strategy of herdsmen acting in their own best interests?

• A. Have fewer cows
• B. Buy more cows
• C. Have the same amount of cows as your neighbor
• D. None of the above

Which of the following environmental issues is not an example of the tragedy of the commons?

• A. Increased atmospheric carbon dioxide due to burning of fossil fuels
• B. Spread of an invasive species
• C. Depletion of fish stocks in the world's oceans
• D. Deforestation

Here’s what students ask on this topic:

What is the free rider problem in economics?

The free rider problem occurs when individuals can benefit from a good or service without paying for it, leading to under-provision of that good or service. This is common with public goods, which are non-rival and non-excludable. For example, a fireworks show can be enjoyed by anyone without purchasing a ticket, as it is difficult to exclude people from viewing it. As a result, individuals may choose not to pay, expecting others to cover the cost, which can lead to the good being underfunded and not provided at all. Governments often intervene to solve this issue by funding public goods through taxation.

How does the government address the free rider problem?

Governments address the free rider problem by funding public goods through taxation. Since public goods are non-rival and non-excludable, private markets often under-supply them due to individuals' reluctance to pay. For instance, in the case of a fireworks show valued at $1,000 by townsfolk, individuals might avoid paying, hoping to enjoy the show for free. The government can impose a small tax on residents to collect the necessary funds, ensuring the good is provided. This way, the marginal benefit of the public good exceeds or equals the marginal cost, making it feasible to supply the good.

What is the tragedy of the commons?

The tragedy of the commons refers to the overuse and depletion of common resources, which are rival but non-excludable. An example is grazing land where multiple shepherds bring their sheep. Since no one owns the land, each shepherd maximizes their benefit by grazing as many sheep as possible, leading to overgrazing and eventual depletion of the resource. This occurs because the cost of overuse is shared by all, but the benefits are reaped individually. Clearly defined property rights or regulatory measures can help mitigate this problem by aligning individual incentives with the collective good.

How can property rights help solve the tragedy of the commons?

Property rights can help solve the tragedy of the commons by assigning ownership or usage rights to individuals or groups, thereby aligning personal incentives with the collective good. When a resource like grazing land is owned, the owner has a vested interest in maintaining its sustainability. For example, if Johnny owns the grazing field, he will limit the number of sheep to prevent overgrazing, ensuring long-term productivity. Alternatively, a landlord could charge fees for grazing, using the revenue to manage and preserve the resource. Clearly defined property rights create accountability and encourage responsible use of common resources.

What are some examples of public goods and common resources?

Public goods are non-rival and non-excludable, meaning one person's use does not reduce availability for others, and it is difficult to exclude anyone from using them. Examples include national defense, public parks, and street lighting. Common resources, on the other hand, are rival but non-excludable. This means one person's use diminishes availability for others, but it is hard to prevent anyone from using them. Examples include fisheries, grazing lands, and clean air. Both types of goods face unique challenges: public goods suffer from the free rider problem, while common resources are prone to overuse and depletion, known as the tragedy of the commons.