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

Public goods, characterized by non-rivalry and non-excludability, 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 their desire to benefit without payment. Governments often intervene by taxing residents to provide such goods, ensuring marginal benefits exceed marginal costs. 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, necessitating defined ownership to internalize externalities.

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? So, public goods, if you remember, these 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, 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 under-supplied. 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 under-supplied, and we're going to see an example why. So, we're going to talk about free riders and the free rider problem, right? So, 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 fireworks 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 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 there, 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? So, instead of saying that they would value this show at $10, they would probably undervalue 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 at, we can see there's like this $1,000 benefit that could happen if people 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 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 hire 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 in, but the main takeaway here on the grand scale, governments are generally going to provide public goods and it's going to be justifiable 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 my true passion is to create live screenplays. I've got a synopsis for one that I've been playing out in my head, and I want to share it with you to see what you guys think. So let's talk here about common resources and the tragedy of the commons. This is going to be the theme of my play.

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. A great example was the fish in the ocean. 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. Let me go ahead and let's dive into my 5-act play. This is a tragedy called Mac death.

Mac Death by Brian.

Act 1, enter Johnny Clutch. Johnny Clutch is moving to this small paradise town of Small Town. Johnny Clutch is a shepherd, 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 two 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 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, what we see is that when we have common resources, in this case, we have this common resource of 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, right? And as Johnny made more money, maybe he bought more sheep and he kept grazing. He saw that all the potentials 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, that 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. And the externality is the cost to the field, the grass is no longer there, there's this cost being imposed 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's no clearly defined property rights. This field is just common land that anybody can use, but let's say the field had belonged to Johnny, right? If Johnny owned the field, he would have known only to 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 just has to be clearly defined. 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. We've got the price and the quantity of sheep, and we've got our downward demand, 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. We're used to this supply curve, which is kind of just the cost of raising the sheep, the costs to the shepherd himself, Johnny's personal cost. But we see that there's this cost to society as well, right? When there are 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 at this quantity of sheep. Let's focus on the quantity here. The market will find this equilibrium when they don't think about this externality. This externality doesn’t come into play, and the market is going to find this equilibrium. But truly, the real efficient equilibrium when we consider all costs to society would have been down here. So what do we see is that we're overproducing, we have too many sheep, there are 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-rivalrous (one person's use doesn't reduce availability to others) and non-excludable (it's difficult to prevent anyone from using them). For example, a fireworks show is a public good because people can watch it without paying, leading to insufficient funding if left to the private market. Governments often intervene by taxing residents to ensure these goods are provided, ensuring the marginal benefit exceeds the marginal cost.

How does the tragedy of the commons illustrate the overuse of common resources?

The tragedy of the commons illustrates the overuse of common resources, which are rivalrous (one person's use reduces availability to others) but non-excludable (difficult to prevent access). An example is a common grazing field where each shepherd benefits from grazing their sheep but doesn't bear the full cost of overgrazing. Without defined property rights, each shepherd maximizes their use, leading to resource depletion. This overuse occurs because the external cost to society (depleted grass) isn't considered. Solutions include establishing property rights or regulatory measures to internalize these externalities and manage resource use sustainably.

Why are public goods typically provided by the government?

Public goods are typically provided by the government because they suffer from the free rider problem, leading to under-provision in private markets. Public goods are non-rivalrous and non-excludable, meaning individuals can benefit without paying, reducing the incentive for private entities to supply them. For instance, a fireworks show valued by the community may not be funded privately due to free riders. Governments can tax residents to fund these goods, ensuring provision when the marginal benefit to society exceeds the marginal cost. This intervention helps achieve an efficient allocation of resources and ensures public goods are available to all.

What are some solutions to the tragedy of the commons?

Solutions to the tragedy of the commons involve internalizing the external costs associated with overuse of common resources. One approach is to establish clear property rights, where ownership incentivizes sustainable management. For example, if a grazing field is privately owned, the owner will regulate use to prevent depletion. Another solution is government intervention through regulations or taxes that limit use and promote conservation. Additionally, community management, where local users collectively manage the resource, can be effective. These solutions aim to align individual incentives with societal well-being, ensuring sustainable use of common resources.

How do externalities relate to the tragedy of the commons?

Externalities are costs or benefits of an activity that affect third parties not directly involved in the transaction. In the tragedy of the commons, the externality is the overuse of a common resource, leading to its depletion. For example, when multiple shepherds graze their sheep on common land, each benefits individually but imposes a cost on others by depleting the grass. This negative externality results in overuse and resource exhaustion. Addressing these externalities through property rights, regulations, or community management can help align individual actions with the overall societal interest, promoting sustainable resource use.