Public Goods Vs Free Rider Problems

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Last Updated on November 23, 2020 by admin

Public Goods Defined
A public good,  are goods that are both non-excludable and non-rival. There are many examples of these types of goods, including: national defense, law enforcement, lighthouses, disease prevention, public sanitation, scientific research, broadcast television. These types of goods are often provided via government, but not necessarily. In the case of broadcast television, we have both: Commercial television and Public television. Note that,  Social goods are defined as public goods that could be delivered as private goods, but are usually delivered by the government for various reasons, including social policy, and funded via public funds like taxes.

Free Rider Problem Explained
The free-rider problem occurs when those who benefit from resources, goods, or services do not pay for them, which results in an under provision of those goods or services. For example, a free-rider may frequently ask for available parking lots (public goods) from the ones who have already paid for them, in order to benefit from free parking. At the end of the day, one may see that the free-rider have used the parking even more than the others without paying a single penny. The free-rider problem is the question of how to limit free riding and its negative effects in these situations. The freerider problem may occur when property rights are not clearly defined and imposed.The free-rider problem is common with goods which are non-excludable, including public goods and situations of the Tragedy of the Commons.
However, free rider also occurs, when people can enjoy a good service without paying anything (or making a small contribution less than their benefit.) If enough people can enjoy a good without paying for the cost then there is a danger that, in a free market, the good will be under-provided or not provided at all.Another way to explain the free-rider problem is a slogan like ―Let George do it‖ – where George stands for the rest of the world.
Examples Of Free Rider Problem
It is good to reduce our production of landfill rubbish. However, if one person in a city of five million produces less rubbish, it makes little difference. There is an incentive to freeride on efforts of other people to recycle and make less effort yourself. In other words, we free ride on the efforts of others to recycle. Clean a common kitchen area. It would be good if we all contributed to cleaning the kitchen but there is a temptation to leave for one person who will do it all for us 46. A free rider problem is also said to occur when there is overconsumption of shared resources: This is also known as the tragedy of the commons. For example, a fisherman may take a high catch and free ride on other fishermen who are more concerned to preserve sustainable fish stocks.
Solutions To Free Rider Problem
  • Tax and government provision :- One solution is to treat them anybeneficiaries as one consumer and then divide the cost equally. For example, UK national defense costs £31bn. This results in higher taxes for UK taxpayers. Therefore the cost of national defense is paid indirectly by UK taxpayers. This ensures everyone who benefits from the service pays towards the cost. Some may dislike this approach e.g. some anti-war protesters have tried to withhold a certain % of their tax arguing they don‘t want to make contributions to illegal wars. But, most people accept paying taxes.Austrian economists may criticize this approach arguing there is no guarantee the government knows consumer preferences and coercive action to make everyone pay and provide the good could lead to goods society does not really need.
  • Appealing to people’s altruism:- For some goods like visiting
a garden, the garden may be able to raise funds by asking for donations if you enjoy your visit. There will probably be many free riders‘ who don‘t make a donation. But, enough people may be willing to make a donation to fund the cost of the garden/museum. This solution is only effective for services which have relatively low cost. People do not mind paying $500 if other‘s free ride. But, if there was a voluntary donation of $500 for national defense, would anyone pay it?
  • Make a public good private : –  A beautiful garden could be
seen as a public good. However, if you erect a high barrier and limit entrance to those willing to pay, it loses its feature as a public good and becomes a private good.
  • Legislation : To deal with the free rider problem associated
  • with overconsumption of common resources. The government have tried various options such as:
    * Quotes – difficult to implement and difficult to monitor
    * Legislation – on size of net size, number of fishing vessels
    Compensation to move away from fishing.
Free-rider Problem Theory
  • An Economic Theory of Democracy (1957) Anthony
Downs―Provision of national defense is a boon to every citizen; even if one citizen paid for it solely out of his own pocket, all the others would gain from it. Where citizens are numerous, each man finds it advantageous to refuse to pay for such indivisible benefits. Instead he assumes that other men will bear the cost and he will benefi.  This situation means that voluntary action cannot produce a Pareto optimum in a large society when collective goods exit.
  • Welfare Economics and the Theory of the State (1952)
William Baumol – makes case for government provision of public goods in areas where there is free-rider problem.
  • Logic of Collective Action (1965) Mancur Olson. Olson noted
the mismatch between individual incentives and the collective interest of society.
  • Theory of public goods (1954) Paul Samuelson. Samuelson
noted how once public goods were provided they can be consumed at zero marginal cost.

Conclusion
Whether you belief or not, we receive free goods and services every day and every time. We are used or accustomed to them that we don’t often notice. For example, when you relax in a cool cafe on a hot summer day, you are receiving the benefit of air conditioning that you are not paying for. This is an example of a public good. Public goods are products or services we all use.  We all use them, each of us cannot be charged individually for them. The cafe you enjoy could not really put a number on how much air conditioning you enjoyed during your visit, so the owners cannot fairly charge you for it.

Public goods are typically financed by business owners or the government through tax revenues. When a public good is consumed, the amount left for others to consume is not reduced, and it cannot be withheld from those who are unable to pay for it. For example, when you enjoy the air conditioning in a café, there is not less air conditioning for others to enjoy.

There is no competition to provide public goods because they are supplied to everyone. The police force is a good example of this. When we feel unsafe because we have heard strange noises late at night, we do not select which company to call. We simply call the police. There is no competition among producers and providers for public goods, they are referred to as non-rivalries and non-excludable. Nonexcludable means that no one can be denied the service. For example, anyone who feels unsafe can call the police.
References
Mendy, D. H., (2003).
Public Goods and Society Benefit, a textbook, 2nd edition, Mill  World Press limited.

Faraday, Q.O., (2013). Public Finance in Global world, textbook 1st edition,

West Point Press limited
Author: Simnify

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