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The free rider problem of public goods

Private companies find it difficult to produce public goods. If a good or service is nonexcludable, like national defense, so that it is impossible or very costly to exclude people from using this good or service, then how can a firm charge people for it?

Visit this website to read about a connection between free riders and “bad music.”

When individuals make decisions about buying a public good, a free rider    problem can arise, in which people have an incentive to let others pay for the public good and then to “free ride” on the purchases of others. The free rider problem can be expressed in terms of the prisoner’s dilemma game, which is discussed as a representation of oligopoly in Monopolistic Competition and Oligopoly . Say that two people are thinking about contributing to a public good: Rachel and Samuel. When either of them contributes to a public good, such as a local fire department, their personal cost of doing so is $4 and the social benefit of that person’s contribution is $6. Because society’s benefit of $6 is greater than the cost of $4, the investment is a good idea for society as a whole. The problem is that, while Rachel and Samuel pay for the entire cost of their contribution to the public good, they receive only half of the benefit, because the benefit of the public good is divided equally among the members of society. This sets up the prisoner’s dilemma illustrated in [link] .

Contributing to a public good as a prisoner’s dilemma
Samuel (S) Contribute Samuel (S) Do Not Contribute
Rachel (R) Contribute R pays $4, receives $6, net gain +$2
S pays $4, receives $6, net gain +$2
R pays $4, receives $3, net gain –$1
S pays $0, receives $3, net gain +$3
Rachel (R) Do Not Contribute R pays $0, receives $3, net gain +$3
S pays $4, receives $3, net gain –$1
R pays $0, receives $0
S pays $0, receives $0

If neither Rachel nor Samuel contributes to the public good, then there are no costs and no benefits of the public good. Suppose, however, that only Rachel contributes, while Samuel does not. Rachel incurs a cost of $4, but receives only $3 of benefit (half of the total $6 of benefit to society), while Samuel incurs no cost, and yet he also receives $3 of benefit. In this outcome, Rachel actually loses $1 while Samuel gains $3. A similar outcome, albeit with roles reversed, would occur if Samuel had contributed, but Rachel had not. Finally, if both parties contribute, then each incurs a cost of $4 and each receives $6 of benefit (half of the total $12 benefit to society). There is a dilemma with the Prisoner’s Dilemma, though. See the Work it Out feature.

The problem with the prisoner’s dilemma

The difficulty with the prisoner’s dilemma arises as each person thinks through his or her strategic choices.

Step 1. Rachel reasons in this way: If Samuel does not contribute, then I would be a fool to contribute. However, if Samuel does contribute, then I can come out ahead by not contributing.

Step 2. Either way, I should choose not to contribute, and instead hope that I can be a free rider who uses the public good paid for by Samuel.

Step 3. Samuel reasons the same way about Rachel.

Step 4. When both people reason in that way, the public good never gets built, and there is no movement to the option where everyone cooperates—which is actually best for all parties.

Questions & Answers

What are considered as unlimited and insatiable in economics?
Benedict Reply
Dis my question Josef schumpeter defines Entrepreneurship as?...innovation process where a prospective individual creates something new?. a) what are the new things often created by the Entrepreneur? b) what are the four kinds of innovation emphasized in the definition?
Josephine Reply
what is complementary goods?
kwesi Reply
demands for one goods generates demand for other goods is called complementory goods.For Example coffee and sugar.
Rambharosh
It means you have to purchase sugar also if you purchase coffee.
Rambharosh
What is deflation
Aluko Reply
I don't know
Olaitan
decrease the price of commdity.
Seven
Deflation is the process where by communities offered for sale are more than the purchasing power, thus money available to buy.
Dwamena
Enumerate emotional intelligence to a manager
Chinonso Reply
What about Sydney Alexander's Absorption approach in international trade?
Vibhas Reply
I need help in inflation graphs
Brandon Reply
Select inflation type, Demand pull, cost pull or anticipation 1- Select the set of data you intend on graphing i.e inflation rate of 2017, location (particular country) 2 - Select the type of measurement tool that best allows you to input the inflation data, Consumer price index is the most accurate
Jama
this is to make sure you have all the correct information, Also use should know 1- Cost pull is Aggregate Demand and Aggregate Supply AD - AS graphed 2- Demans pull is Aggregate Supply and Aggregate Demand AS - AD graphed
Jama
what are costs of inflation ?
Rambharosh
what is production
Imoro Reply
please does anyone know anything about entrepreneurship
Josephine
anyone... please help me out
Josephine
Dis my question Josef schumpeter defines Entrepreneurship as“...innovation process where a prospective individual creates something new”. a) what are the new things often created by the Entrepreneur? b) what are the four kinds of innovation emphasized in the definition?
Josephine
Entrepreneurship The talent, knowledge and willingness to engage in New activities, especially that those that may result in New kinds of firm.
Angela
OK... thanks @Angela Ikanau
Josephine
please help me with my question
Josephine
Entrepreneurship can also be, The ability and willingness to undertake the organization and management of production. As well as making the usual business decisions , entrepreneurship is also associated with functions of innovative and bearing risks.
Angela
Production is the process by which human labour or work is applied, usually with the help of tools and other forms of capital to produce useful goods and services.
Angela
The new things often created by an entrepreneur are management skills,risk bearing, self motivation, passion, how to increase sales, minimization, profit maximisation, general administration and welfare of the business
Ademola
thank you @Ademola Omotolany
Josephine
Schumpeter identifies following five types of innovations that define the entrepreneurial act (note: the bold heading is mine). 1. Product: The introduction of a new good – that is one with which consumers are not yet familiar – or of a new quality of a good.
Ademola
2. Process: The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned.
Ademola
3. Business model : The opening of a new market, that is a market into which the particular branch of manufacture of the country of question has not previously entered, whether or not this market existed before.
Ademola
4. Source of supply : The conquest of a new source of supply of raw materials of half manufactured goods, again irrespective of whether this source already exists or it has first to be created.
Ademola
5. Mergers & divestments: The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position.
Ademola
Awww thanks you so much @Ademola Omotolany
Josephine
production is the transformation of existing resources into new products or services
Samuel
Entrepreneur is the human factor that provides the capital for the business, takes the major decisions and bears the risk of the business
Samuel
l respect the intelligency of the people of this group. please I need thorough explanation of the word " cetri paribus"
olasupo
@olasupo "cetri paribus" is a latin word and it means "all other thing being equal"
Rambharosh
Thanks Yadav, that "all things being equal" is what I need explanation on because I assume is not possible to equate all things
olasupo
it is just for assumption
Rambharosh
Alright thanks
olasupo
Since economics deal with people who can alter things at any time in other to agree on certain theories there is the need to hold some actors constant
Ntui
what is a monopolistic competition?
moniman Reply
Enumerate emotional intelligence to a manager
Chinonso
Enumerate emotional intelligence to a manager
Chinonso
who is barter
Tening Reply
exchange goods each other
Seven
what is economic
Bah
is the use of scares resources to satisfy our unlimited needs and wants
Desiderius
how many kinds of utility functions?
Sadaf
What is partnership?
Jackson
the legal association of two or more people as co-owners of a business for profit.
harmony
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product?
James Reply
no
Sadaf
what is supply
Mizta Reply
what is opportunity cost
Mizta
The opportunity gained interms of opportunity lost is known as opportunity cost Or The second best alternative use of resources
Mir
forgone alternative: like forgoing Something our of two to buy one
Tam-Waribo
what is macro economic s
Addo Reply
macroeconomics is the study of economic as a whole level.
Gafar
meaning of positive science
Sumit Reply
positive science it is focused on facts and cause and effect and behavioural relationship and include developmental testing in economic theoreis.
Gafar
what is inflation
Sama Reply
inflation is the general price increase of goods and services in an economy.
tesfie
Inflation is the persistent rise in the general price level
T-Max
inflation is characterized by increase in the general price of goods and services. when there is too much money in circulation. increase in demand of goods pursuing fewer goods. when purchasing power of money decreases .
Ejikeme
inflation is the persistent rise general price level
Habeeb
inflation is the persistent increase in price
Machall
hi
Rafiu
yes
boston
hi
Ayaan
how are you
Ayaan
increase in the general level of price...
sade
what is deflation
Sele
is the gradual decrease of currency exchange in a country.
Gafar
why ecnomics important ? give answer plz
Saifullah
Because is a field of science study that reflects on our day to day activities with human behavior.
ANSU
why economic is a science
Imoro
Economics is referred to as a social science not a pure science. It's regarded as a social science because it makes use of the scientific method to solve problems. The scientific method refers to observation, asking questions, forming hypothesis, experimentation etc
Nkechi
Economics is a social science because it study human behavior how he relates with his daily activities with the available limited resources to satisfy his wants.
Ojo
what are the factors affecting the demand
Mohammed
yeah it uses the scientific method to study human behaviour.
Nkechi
inflation referes to the persistant increase in the general price of goods and services over a given period of time say a year.
Abdul
factors affacting Demand of good and services are 1.price of a commodity in question 2.price of related commodity 3.Income of a consumer 4.Population 5.tast and prefereance 6.Season or weather condition
Abdul
what is difference between perfect and non perfect market.
Saheed
what the difference between Trade off and Opportunity Cost?
Elzevery
answer
Golda
In trade off, you increase the amount of something by decreasing the amount of something else. For example, you use 2 hours to study and 2 hours for leisure. if you increase study hour by 1 more hour, i.e 3 hours, leisure time will decrease by 1 hour, i.e 1 hour.
harmony
In all, you would have traded off 1 hour of leisure time for 3 hours of study time. But in opportunity cost, you let something go in order to obtain something else entirely.
harmony
thanks for your idea
Elzevery
please i want help on thid question given P=$10 And TC=120+4Q2 1.find the profit maximizing level of price and quantity. 2.what will be the total profit?
Shemels
please how is substitutional effect affecting demand
Acha
if a price of a particular commodity is high people demand less ,they rather go for less one
FIDELIS
what is account
Wasif
account is an arrangement between a customer and a bank that allows the customer to play in and take out money (bank account)
Johnny
pay, not play sorry
Johnny
four effects of inflation in an economy
Acha
oil
TsendeTheRipper
decreases living standards .. decreases purchasing power.. Decreases internation competition . increases the cost of borrowing
MansoorAfghan
Inflation refers to persistent increase in the general prices of commodities.
Aluko
he asked for effects
MansoorAfghan
Low standard of living, prices of commodities will be high, devaluation of currency in the economy
Aluko
Debtors gain while creditors loses
Ojo
Hi every one
Ani
Hello
Ansah
hi
kelvin
hi
Seven
Hii
raushan
how are you all
Seven
Fin and you
raushan
me also
Seven
Whare do you live
raushan
general tendency of rising price and continuous... .
Auqib
any one among you is going to aaper in net exam day after tomorrow
Auqib
reply?
Auqib
pakistan
Seven
Oo Pakistan I am India
raushan
really from Pakistan
Auqib
ok
Seven
You noo hindi
raushan
no
Seven
hi
ken
what is deference between the producer and firm?
ISMAILI
A producer, going by its name, only makes tangible goods and services from the use of raw materials or from the ground up. Meanwhile, a firm can be a wholesale corporation can depends directly on the finished goods and services of the producer in order to resell to the market.
harmony
Okay! I got a point.. so can you give an examples Harmony?
ISMAILI
An example for the producer would be Microsoft Corporation that makes Windows Operating System for computer-making firms like Acer, Dell, Hp, etc.
harmony
Calculate the elasticity coefficient when price decrease from 60 to 50 and 40 to 30 interpret the result
Acha
Thanks for your ideas bro..
ISMAILI
My pleasure, Shabani.
harmony
hi
Habib
hello rum I can see some great economists here
olasupo
And how does this thing even work
MansoorAfghan
does everyone on the app get the questioms
MansoorAfghan
ns
MansoorAfghan
mec
Abdul

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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