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The Free-Rider Problem

Xerographica

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We all want adequate levels of the goods that we value...right? The problem is that there are some goods, known as "public goods", that people can benefit from without paying for. This problem is known as the free-rider problem.

In order to deal with the free-rider problem we force people to pay taxes and allow the government to produce these public goods. The challenge is that we do not value all public goods equally. What might be a public good for one person might not be a public good for another person. In order to try and decrease the tax rate many people are inclined to argue that the free-rider problem does not apply to public goods that they do not value.

The main political ideologies can be roughly organized based on their perceptions of how pervasive the free-rider problem actually is...
How can we figure out who is correct? How can we determine what goods, if any, the government should be responsible for providing? If the private sector can produce adequate levels of a public good then wouldn't it be redundant/wasteful for the public sector to also produce that same good? Redundancy, or the misdirection, of public funds can also be thought of as the inefficient allocation of public funds.

In order to discern the actual scope of government we should allow taxpayers to directly allocate their taxes to "essential" government organizations. An "essential" government organization is one that provides important public goods that the private sector either partially or completely fails, because of the free-rider problem, to provide. Allowing taxpayers to directly allocate their taxes is known as pragmatarianism.

The biggest challenge to pragmatarianism is that people do not understand how the invisible hand works. People instinctively get the feeling that "important" public goods would be underfunded and "less important" public goods would be overfunded. The thing is...in a pragmatarian system taxpayers would still have the option to give all their taxes to congress. If congress was efficiently allocating taxes...then why would any taxpayers choose to directly allocate their taxes themselves?

The fundamental concept to try and understand is that the only way we can accurately determine the "importance" or "value" of a public good is by seeing how much funding it would receive relative to other public goods. This is known as the "opportunity cost" concept. This concept is simply the idea that you can't have your cake and eat it too. Deciding whether you eat or have your cake reflects your true values. The problem with the current system is that voters can convey their opinions...but taxpayers are unable to convey their true values. In a pragmatarian system voters would determine the functions of government and taxpayers would determine which functions they funded. In essence...by allowing people to put their money where their mouths are...we can determine the best possible use of public funds.

What if you disagree with pragmatarianism? Then please explain what basis you have for believing that congress can efficiently allocate taxes. As far as I can tell...the current system is based on nothing but tradition. Nearly 1000 years ago some Barons were not happy with how the king was spending their money so they forced him to relinquish the "power of the purse". That's the cliff notes version but there is no logical or rational basis for believing that 535 people can efficiently allocate the taxes of millions and millions of taxpayers. Parliament did not have to interview for this position. They did not end up with this position because they were uniquely qualified. All they had to do to get this position was to take it by force from the king. That's it. Just because they stole control of taxes from a king does not make their control over taxes any more legitimate than the king's control of taxes was. Why did the king have control over taxes in the first place? Because people believed he had "divine authority". In the past 1000 years we've learned a bit more about how scarce resources are efficiently allocated.

Hayek's concept of partial knowledge ties into Bastiat's concept of opportunity cost which ties into Smith's concept of the invisible hand...which ties all the way back to Buddha's explanation of how we are all just blind men touching different parts of an elephant. The true scope of government can only be revealed by adding all our limited perspectives together.

It's great if you want to argue against pragmatarianism...but please help me understand why you believe that congress is better qualified to efficiently allocate taxes.
 
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I promise a more detailed response to your post later, but I must say that this problem is not new, nor is it visionary in deciphering, and articulating it.

The corruptability of man is often if not always missed when philosophers and the like present great new ideas for social systems. The corruptability of man (COM for short) is thought to be unquanitfiable, and I suppose there might be soem truth to that, however, there are things we can do to lessen the impact the COM has on public policy, and social systems. The problem with the opportunity cost is in practicality. How, for instance does one who does not pay taxes, allocate their none contribution? Would a person who is not currently paying taxes allocate their taxes the same if they were more wealthy, or less wealthy? Does one's position in life artificially corrupt their moral pinnings? Would my allocation of public funds be the same throughout my life, and as I mature personally, socially, and economically? Another flaw in his thinking, (Generally) is the categorization of the public purse. How do you separate a man down on his luck from a man who intentionally finds himself in this position? Is welfare for families, any more moral than welfare for the individual? What constitutes public welfare and who qualifies, and in this opportunity costing, how does the tax-payer decide? There literally can't be a workable solution if the number of tax allocating categories is limitless, is there?

Just some random initial thoughts when reading your post.

On another note, this is an important topic, and one we need to address if our system of government is to improve. Thanks for raising the issue.


Tim-
 

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We all want adequate levels of the goods that we value...right? The problem is that there are some goods, known as "public goods", that people can benefit from without paying for. This problem is known as the free-rider problem.

Why is this a problem? Who is being hurt?

Perhaps you could give a specific example?
 
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StillBallin75

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The forum owners could easily forbid non-donating members from posting, if that's what they wished, no?

It could, but I was merely pointing it out as an example of the free-ridership problem. In other cases, it's not so easy to exclude folks from using public goods. Public radio would be a good example.
 

Xerographica

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Hicup, compare your concern with Keridan's concern. Then compare your concern with these people's concerns. Then compare your concern with these people's lack of concern.

Your concern, and everybody else's concerns, is what decreases my concerns regarding the outcome of pragmatarianism. If you want to decrease your concerns then go ask all your friends what their concerns would be. Their concerns will indicate how they themselves would allocate their taxes. That's how the invisible hand works. We want the demand for public goods to determine the supply of public goods. The demand for public goods can only be determined by people's values...and values can only be determined by forcing people to consider the opportunity costs of their tax allocation decisions.
 

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It could, but I was merely pointing it out as an example of the free-ridership problem.

But it isn't an example, since the owners could easily exclude anyone they wish.

In other cases, it's not so easy to exclude folks from using public goods. Public radio would be a good example.

What problem do free riders pose to a radio broadcaster?
 

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The forum owners could easily forbid non-donating members from posting, if that's what they wished, no?

And this forum would suffer as a result.
 

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The freerider problem is always going to exist. There is nothing you can do about it. There will ALWAYS be someone who will live off the hard work of another.

Now, I'm not saying this means we abandon the idea of accountability...but instead, we accept the idea that there will be a few who simply don't get on board with the idea, and from there, try to find a way to bring some good out of it.

Once again, though, I have no answers, nothing concrete, only a feeling about it. Which is far from constructive.
 

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The freerider problem is always going to exist. There is nothing you can do about it. There will ALWAYS be someone who will live off the hard work of another.

Now, I'm not saying this means we abandon the idea of accountability...but instead, we accept the idea that there will be a few who simply don't get on board with the idea, and from there, try to find a way to bring some good out of it.

Once again, though, I have no answers, nothing concrete, only a feeling about it. Which is far from constructive.

I have yet to be convinced that free riders are actually a problem. And if they are a problem, to whom are they a problem?
 

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I have yet to be convinced that free riders are actually a problem. And if they are a problem, to whom are they a problem?

Free riders are a problem to the folks that AREN'T free riders, in a morale since. Imagine going to work everyday, and busting ass, only to find that there are other people at your job doing NOTHING but making the same pay as you. How would that make you feel, and how would that affect your work?


Apply that same concept to the free rider issue.
 

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Free riders are a problem to the folks that AREN'T free riders, in a morale since. Imagine going to work everyday, and busting ass, only to find that there are other people at your job doing NOTHING but making the same pay as you. How would that make you feel, and how would that affect your work?

Apply that same concept to the free rider issue.

I'm still trying to understand exactly what the free rider "issue" is. What is the problem posed by free riders?
 

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I'm still trying to understand exactly what the free rider "issue" is. What is the problem posed by free riders?

Morale. I just stated it. No one likes to work hard to provide for others, especially of those others don't even so much as provide a thank you. Again, pretend you work for a place, and that place has YOU working hard...and then there are others who don't, but they enjoy a similar quality of life as you, even though they don't work like you do to get it.


It is, and always has been, a morale issue.
 

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Morale. I just stated it. No one likes to work hard to provide for others, especially of those others don't even so much as provide a thank you. Again, pretend you work for a place, and that place has YOU working hard...and then there are others who don't, but they enjoy a similar quality of life as you, even though they don't work like you do to get it.


It is, and always has been, a morale issue.

Is the example you provided (one employee working hard while another slacks) an analogy? Or is that an actual example of the free rider problem?

I've heard various explanations of the free rider problem, but never as you described it.
 
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I'm still trying to understand exactly what the free rider "issue" is. What is the problem posed by free riders?

The free rider problem is a problem of market failure (it is not a problem imposed by anyone). It is the under-provision of goods and services people value stemming from their nonexcludable nature. Public goods are goods that are considered:

1. Non-excludable - you cannot exclude people from consuming the good
2. Non-rival - The benefits from consuming the the good does not decrease the benefits of other consuming it.

For example, people like gardens and if people could elicit the benefit that other people get from their gardens, then we would have more gardens. However, since gardens tend to be nonexcludable, then you cannot elicit payment and the incentive to provide the good decreases, therefore decreases the supply of the good.

When left up to the market, gardens are under-provided. As for the case of gardens, public policy is to basically to do nothing. However, apply this concept to environmental goods, light houses, national defense, street lighting, research and development, etc. and you see room for public policy.

Most economists can agree that the free rider problem exists (i.e. market failure can occur due to the nonexcludable nature of the good), however they will disagree on the magnitude of the problem and the correct role of the government. Many free market economist will say that the magnitude of the free rider problem is very small and therefore, the role of the government to correct for the under-provision of the good should be minimal to nonexistent. Other economists place a larger magnitude on the free rider problem and see a bigger role for the government.

Regardless, the free rider problem is of little practical interest. The more practical and politically interesting questions revolve around providing collective goods whether or not the meet the public good definition.
 
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For example, people like gardens and IF people could elicit the benefit that other people get from their gardens, then we would have more gardens. However, since gardens tend to be nonexcludable, then you cannot elicit payment and the incentive to provide the good decreases, therefore decreases the supply of the good.

That is my disagreement with the concept of the free rider problem. The market fails when compared to an impossible world in which the gardener could exclude others from enjoying his garden, and thus charge others for the enjoyment they currently receive as an externality. In such an imaginary world, we are told, there would be more incentive to have gardens. But in our current world, the real one, the gardener can't exclude others from enjoying his garden.

The so-called market failure is only that our current world doesn't match some hypothetical world imagined by economists.
 

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Antiderivative, the free-rider problem is of little practical interest? Here in Los Angeles we have the LA Arboretum (a government organization) and the Huntington Botanical Garden (a non-profit organization). Do you think that just because enough voters "vote" for the LA Arboretum it definitively means that we should have the LA Arboretum? Nope. The only way we can truly know whether Los Angeles needs two botanical gardens is if taxpayers were allowed to directly allocate their taxes. This would force them to consider the opportunity costs of their tax allocation decisions. Forcing taxpayer to decide between having their cake or eating their cake is the only way we can gauge their true values.

As I explained in my original post...if you don't trust the invisible hand to efficiently allocate taxes...then please help me understand why you trust congress to efficiently allocate taxes.
 
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Antiderivative, the free-rider problem is of little practical interest? Here in Los Angeles we have the LA Arboretum (a government organization) and the Huntington Botanical Garden (a non-profit organization). Do you think that just because enough voters "vote" for the LA Arboretum it definitively means that we should have the LA Arboretum? Nope. The only way we can truly know whether Los Angeles needs two botanical gardens is if taxpayers were allowed to directly allocate their taxes. This would force them to consider the opportunity costs of their tax allocation decisions. Forcing taxpayer to decide between having their cake or eating their cake is the only way we can gauge their true values.

The truth of the matter is that the best example that you can conjure up with to discuss the practical importance of the public good problem is the LA Arboretum speaks volumes. Nonetheless, I think you are touching upon the more important concept, which I previously touched upon; public choice theory regarding the provision of collective goods.

As I explained in my original post...if you don't trust the invisible hand to efficiently allocate taxes...then please help me understand why you trust congress to efficiently allocate taxes.

My previous post was not in response to this question, or really to your OP. It was to clear some confusion of what the free rider problem was. However, I will point this out. Taxation distorts the invisible hand, and therefore you cannot rely on the "invisible hand to efficiently allocate taxes". If you relied upon the invisible hand for maximum efficiency in the first place, then you wouldn't need taxation. Your question is slightly confusing.
 
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That is my disagreement with the concept of the free rider problem. The market fails when compared to an impossible world in which the gardener could exclude others from enjoying his garden, and thus charge others for the enjoyment they currently receive as an externality. In such an imaginary world, we are told, there would be more incentive to have gardens. But in our current world, the real one, the gardener can't exclude others from enjoying his garden.

The so-called market failure is only that our current world doesn't match some hypothetical world imagined by economists.

It does not have to be a comparison to the impossible world. For example, the free rider problem of national defense is solved through taxation. Without a strong central government to tax and raise an army to protect from foreign invaders, the market would (arguably) under-provide military service due to the defining features of a public good.

It seems that you are nitpicking the garden example and even that is not a comparison to an impossible world. The idea that we could tax people and redistribute that taxation to people who grow gardens is absurd, but certainly in the realm of possibilities. If we ever enacted such a bill, then we would have an increase supply of gardens, and correcting for the under-provision of the public good.
 

Xerographica

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Antiderivative, let me try again...would allowing taxpayers to directly allocate their taxes result in an allocation of taxes that was more efficient than the current allocation?
 
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Antiderivative, let me try again...would allowing taxpayers to directly allocate their taxes result in an allocation of taxes that was more efficient than the current allocation?

If you want people to have direct control over their taxation, then why tax them in the first place?
 

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It seems that you are nitpicking the garden example and even that is not a comparison to an impossible world. The idea that we could tax people and redistribute that taxation to people who grow gardens is absurd, but certainly in the realm of possibilities. If we ever enacted such a bill, then we would have an increase supply of gardens, and correcting for the under-provision of the public good.

I see. So the solution to the perceived underproduction is to take other people's money to subsidize the gardener. I would admit that then, yes, with a government subsidy, we would have more gardeners. But this comes at the expense of what? The solution is not Pareto efficient - you have now made other people (the ones whose money has been taken) worse off. Are you sure that the overall efficiency has actually been raised?

I'll state right up front that I don't agree with any solution to underproduction that involves coercion. I see the problem of free riders and underproduction as simply the excuse to force other people to subsidize certain producers. I'm sure there are economists up and down the line that can show that some good is being underproduced, and if we could only take money from other people we could have the "right" amount of the good. But as soon as they start talking about forcibly taking money from other people they've lost me.
 

Xerographica

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If you want people to have direct control over their taxation, then why tax them in the first place?

They wouldn't have "complete" control over their taxes. By "taxes" I'm referring to the portion of their income that they have to spend in the public sector.

In other words...taxpayers would be able to directly allocate their taxes to the government organizations of their choosing. The point of taxing them, but allowing them to directly allocate their taxes, would be to determine which public goods, if any, the free-rider problem applies to. If the private sector is producing "adequate" levels of a certain public good then it stands to reason that taxpayers would not choose to allocate any of their taxes to the government organization responsible for producing the same exact public good.

In other words, if the people who value a public good are getting their needs for that public good met by the private sector...then why would they "waste" their taxes by allocating them to the government organization redundantly producing the exact same public good?

But you definitely would not want to get rid of taxes and then discover the hard way that the free-rider problem applies to say...national defense.
 
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