Friday, March 07, 2008

The Free Rider Problem (1) - Public Goods

Economists hate free riders. Christians love them. Before explaining why, I need to define the term. A free rider is a person who receives the benefit of a so-called public good without paying for it.

Economists define a public good using complicated words for simple ideas. The two big words are “nonrivalrous” and “nonexcludability”. The easiest way to explain these words is to describe their opposites.

  • rivalrous means that consuming a good prevents other people from consuming it. A loaf of bread is a rivalrous good. If eat the bread, you cannot eat it too. Unlike bread, a non-rivalrous good can be consumed by many people without preventing others from consuming it. A concert by an orchestra is a non-rivalrous good, because my listening does not prevent other people from listening at the same time. Additional people can listen with no increase in cost.
  • excludability means that people can be prevented from consuming a good once it has been produced. A concert in a theatre is excludable, because people who are unwilling to pay can be shut out of the theatre. An outdoor concert is non excludable, if anyone can walk up and listen.
A fire fighting service is a public good. If some people in a town decide buy a fire engine put out fires that threaten their property, they can provide protection to additional people at no extra cost. The service is excludable in theory, because they owners could refuse to fight fires for anyone who will not pay. In practice, the owners cannot refuse to put out a fire due to the risk of the fire spreading to affect their properties. Someone who has not paid for the service will have their fire put out to prevent it blazing out of control and spreading.

The person who refuses to pay for the fire fighting service is called a free rider. They get the benefit of the service without paying for it.

The classic example of a public good is defence. If some people decide to employ soldiers to protect their town from invaders, people who have not paid for the service will also benefit. Defending the town protects everyone in the town, regardless of whether they have paid for the service or not. Free riders will have their lives and property protected without contributing to the cost.

The full series is here.


Steve Scott said...

How would you classify the internet?

RonMcK said...

Good question Steve. In reality, there are almost no genuine public goods. Very few goods exist that are truely non-excludable.

The internet is not really a public good. Many aspects of it are non-rivalrous, as extra users can be added at no extra costs. However, many parts of internet are excludable. You have to pay to get access through an ISP and usually to have your own website. However, there are many parts of the internet, which are in theory excludable, but which the owners make available for a zero price. This blog is an example. I could choose to limit access and charge a fee, but I have chosen to make it freely available. Or maybe I am kidding myself zero is the market value.

The internet has brought out new business models, where goods are made available free, but the business hopes that it will generate other fee paying activity that will recover the cost. Blogger is an example. It is excludable, but Google has decided to make it available free. They hope to generate their revenue through other fee paying services. This enables the Blessed Economist to be a free rider on Google. Thanks for the blessing Google.