FREE FREE FREE FREE RIDE RIDE RIDE RIDE W HAT HAT IS IS F REE REE RIDE RIDE ? HAT HAT IS IS REE REE RIDE RIDE W HO HO ARE ARE F REE REE RIDERS RIDERS ? HO HO ARE ARE REE REE RIDERS RIDERS
AGENDA AGENDA AGENDA AGENDA • I NTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION • E XPLAINING XPLAINING WHO WHO IS IS FREE FREE RIDER RIDER AND AND EXAMPLES EXAMPLES XPLAINING XPLAINING WHO WHO IS IS FREE FREE RIDER RIDER AND AND EXAMPLES EXAMPLES • V IDEO IDEO IDEO IDEO • E E XPERIENCE XPERIENCE XPERIENCE XPERIENCE - R ULES ULES ULES ULES - H YPOTHESES YPOTHESES YPOTHESES YPOTHESES - R ESULTS ESULTS ESULTS ESULTS - O BSERVATION BSERVATION BSERVATION BSERVATION • Q UESTIONS UESTIONS UESTIONS UESTIONS
Free Free rider rider • A PERSON WHO CHOOSES TO RECEIVE THE BENEFITS OF A " PUBLIC GOOD " OR A " POSITIVE EXTERNALITY " WITHOUT CONTRIBUTING TO PAYING THE COSTS OF PRODUCING THOSE BENEFITS .
• T HE TERM FREE FREE RIDER RIDER WAS FIRST USED IN ECONOMIC THEORY OF PUBLIC GOODS , BUT SIMILAR CONCEPTS HAVE BEEN APPLIED IN TO OTHER CONTEXTS , INCLUDING COLLECTIVE BARGAINING , ANTITRUST LAW , PSYCHOLOGY , AND POLITICAL SCIENCE • T HE HE CONCEPTS CONCEPTS THAT THAT INDIVIDUALS INDIVIDUALS COULD COULD RECEIVE RECEIVE THE THE BENEFITS BENEFITS FROM FROM HE HE CONCEPTS CONCEPTS THAT THAT INDIVIDUALS INDIVIDUALS COULD COULD RECEIVE RECEIVE THE THE BENEFITS BENEFITS FROM FROM GROUP ACTIVITY ACTIVITY WITHOUT WITHOUT BEARING BEARING THEIR THEIR PROPORTIONAL PROPORTIONAL SHARE SHARE OF OF THE THE GROUP GROUP GROUP ACTIVITY ACTIVITY WITHOUT WITHOUT BEARING BEARING THEIR THEIR PROPORTIONAL PROPORTIONAL SHARE SHARE OF OF THE THE COSTS WAS WAS A CENTRAL CENTRAL THEME THEME AND AND IS IS COMMONLY COMMONLY REFERRED REFERRED AS AS FREE FREE COSTS COSTS COSTS WAS WAS CENTRAL CENTRAL THEME THEME AND AND IS IS COMMONLY COMMONLY REFERRED REFERRED AS AS FREE FREE RIDING OR OR THE THE FREE FREE RIDER RIDER PROBLEM PROBLEM RIDING RIDING RIDING OR OR THE THE FREE FREE RIDER RIDER PROBLEM PROBLEM
WHAT WHAT WHAT WHAT IS IS IS IS THE PROBLEM??? THE PROBLEM??? THE PROBLEM??? THE PROBLEM??? • I N ECONOMICS , 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 . • QUESTION ??? • HOW TO LIMIT FREE RIDING AND ITS NEGATIVE EFFECTS IN THESE SITUATIONS ???
• T HE FREE RIDER PROBLEM MAY OCCUR WHEN PROPERTY RIGHTS ARE NOT CLEARLY DEFINED AND IMPOSED . • P UBLIC GOODS ARE CHARACTERIZED BY THE INABILITY TO EXCLUDE NONPAYERS . • T HE FREE RIDER PROBLEM IS COMMON AMONG PUBLIC GOODS .
THESE ARE GOODS THAT HAVE TWO CHARACTERISTICS: non-excludability — non-rivalry non-paying WHEN YOU CONSUME THE • CONSUMERS CANNOT BE PREVENTED • GOOD , IT DOES NOT REDUCE THE FROM USING IT AMOUNT AVAILABLE TO OTHERS . THE POTENTIAL FOR FREE RIDING EXISTS WHEN PEOPLE ARE ASKED TO VOLUNTARILY PAY FOR A PUBLIC GOOD
COMMON COMMON COMMON COMMON EXAMPLE EXAMPLE EXAMPLE EXAMPLE • A FREE RIDER PROBLEM IS DEFENSE SPENDING . N O ONE PERSON CAN BE EXCLUDED FROM BEING DEFENDED BY A STATE ' S MILITARY FORCES , AND THUS FREE RIDERS MAY REFUSE OR AVOID PAYING FOR BEING DEFENDED , EVEN THOUGH THEY ARE STILL AS WELL GUARDED AS THOSE WHO CONTRIBUTE TO THE STATE ' S EFFORTS .
OTHER OTHER EXAMPLE OTHER OTHER EXAMPLE EXAMPLE EXAMPLE • A PERSON PERSON USING USING PUBLIC PUBLIC TRANSPORT TRANSPORT WITHOUT WITHOUT A VALID VALID TICKET TICKET IS IS PERSON PERSON USING USING PUBLIC PUBLIC TRANSPORT TRANSPORT WITHOUT WITHOUT VALID VALID TICKET TICKET IS IS ED WHICH WHICH CARRIES CARRIES THIS THIS SERVICE SERVICE , AT AT THE THE SAME SAME TIME TIME NOT NOT BEAR BEAR BENEFIT BENEFIT BENEFIT BENEFITED ED ED WHICH WHICH CARRIES CARRIES THIS THIS SERVICE SERVICE AT AT THE THE SAME SAME TIME TIME NOT NOT BEAR BEAR THE COST COST FOR FOR ITS ITS MAINTENANCE MAINTENANCE … THE THE THE COST COST FOR FOR ITS ITS MAINTENANCE MAINTENANCE • A PERSON PERSON USES USES THAT THAT OTHER OTHER USERS USERS PAY PAY , SO SO IT IT CAN CAN ALSO ALSO USE USE … PERSON PERSON USES USES THAT THAT OTHER OTHER USERS USERS PAY PAY SO SO IT IT CAN CAN ALSO ALSO USE USE BUT BUT WITHOUT WITHOUT THE THE COST COST OF OF THEIR THEIR OWN OWN … BUT BUT WITHOUT WITHOUT THE THE COST COST OF OF THEIR THEIR OWN OWN IT IS IS DIFFICULT DIFFICULT TO TO EXCLUDE EXCLUDE A PERSON PERSON FROM FROM CONSUMPTION CONSUMPTION • IT IT IT IS IS DIFFICULT DIFFICULT TO TO EXCLUDE EXCLUDE PERSON PERSON FROM FROM CONSUMPTION CONSUMPTION - ANYONE ANYONE CAN CAN TAKE TAKE THE THE PUBLIC PUBLIC TRANSPORT TRANSPORT ANYONE ANYONE CAN CAN TAKE TAKE THE THE PUBLIC PUBLIC TRANSPORT TRANSPORT
VIDEO VIDEO VIDEO VIDEO http://www.investopedia.com/video/play/free-rider-problem/
LET’S LET’S PLAY LET’S LET’S PLAY PLAY PLAY A A A A GAME GAME GAME GAME … … RULES … … RULES RULES RULES I N A NDREONI NDREONI ’ S EXPERIENCE EXPERIENCE : NDREONI NDREONI EXPERIENCE EXPERIENCE • 5 5 PLAYERS 5 5 PLAYERS WITH WITH 50 50 50 50 TOKENS TOKENS EACH EACH WHO WHO CONTRIBUTE CONTRIBUTE TO TO COMMON COMMON OR OR PRIVATE PRIVATE PLAYERS PLAYERS WITH WITH TOKENS TOKENS EACH EACH WHO WHO CONTRIBUTE CONTRIBUTE TO TO COMMON COMMON OR OR PRIVATE PRIVATE ACCOUNT . . . . ACCOUNT ACCOUNT ACCOUNT - P RIVATE RIVATE ACCOUNT ACCOUNT : 1 : 1 : 1 : 1 FOR FOR 1 RIVATE RIVATE ACCOUNT ACCOUNT FOR FOR - C OMMON OMMON ACCOUNT ACCOUNT : : : : FOR FOR 1, 1, 1, 1, ALL ALL RECEIVE RECEIVE 0.5 0.5 0.5 0.5 OMMON OMMON ACCOUNT ACCOUNT FOR FOR ALL ALL RECEIVE RECEIVE • T HE HE GROUP GROUP ' S TOTAL TOTAL PAYOFF PAYOFF IS IS MAXIMIZED MAXIMIZED WHEN WHEN EVERYONE EVERYONE CONTRIBUTES CONTRIBUTES ALL ALL OF OF HE HE GROUP GROUP TOTAL TOTAL PAYOFF PAYOFF IS IS MAXIMIZED MAXIMIZED WHEN WHEN EVERYONE EVERYONE CONTRIBUTES CONTRIBUTES ALL ALL OF OF THEIR TOKENS TOKENS TO TO THE THE PUBLIC PUBLIC POOL POOL (1 (1 VS (1 (1 VS 2.5) 2.5) 2.5) 2.5) THEIR THEIR THEIR TOKENS TOKENS TO TO THE THE PUBLIC PUBLIC POOL POOL VS VS • T HOSE HOSE WHO WHO DO DO NOT NOT CONTRIBUTE CONTRIBUTE ARE ARE CALLED CALLED FREE FREE RIDERS RIDERS . . . . HOSE HOSE WHO WHO DO DO NOT NOT CONTRIBUTE CONTRIBUTE ARE ARE CALLED CALLED FREE FREE RIDERS RIDERS
LET’S LET’S LET’S PLAY LET’S PLAY PLAY PLAY A A A A GAME GAME GAME GAME … … HYPOTHESES … … HYPOTHESES HYPOTHESES HYPOTHESES • N O SIGNIFICANT SIGNIFICANT EVIDENCE EVIDENCE ON ON FREE FREE RIDING RIDING IN IN SINGLE SINGLE - SHOT SHOT GAMES GAMES SIGNIFICANT SIGNIFICANT EVIDENCE EVIDENCE ON ON FREE FREE RIDING RIDING IN IN SINGLE SINGLE SHOT SHOT GAMES GAMES • I N REPEATED REPEATED GAMES GAMES , , DECAY , , DECAY OF OF PROVISION PROVISION OF OF THE THE PUBLIC PUBLIC GOOD GOOD TOWARD TOWARD FREE FREE REPEATED REPEATED GAMES GAMES DECAY DECAY OF OF PROVISION PROVISION OF OF THE THE PUBLIC PUBLIC GOOD GOOD TOWARD TOWARD FREE FREE RIDING LEVEL LEVEL WITH WITH EACH EACH REPETITION REPETITION RIDING RIDING RIDING LEVEL LEVEL WITH WITH EACH EACH REPETITION REPETITION • O FTEN FTEN APPROXIMATION APPROXIMATION OF OF FREE FREE RIDING RIDING AFTER AFTER SUBJECTS SUBJECTS TRIALS TRIALS , , , ALTHOUGH , ALTHOUGH FTEN FTEN APPROXIMATION APPROXIMATION OF OF FREE FREE RIDING RIDING AFTER AFTER SUBJECTS SUBJECTS TRIALS TRIALS ALTHOUGH ALTHOUGH EXACT FREE FREE RIDING RIDING IS IS SELDOM SELDOM REALIZED EXACT EXACT EXACT FREE FREE RIDING RIDING IS IS SELDOM SELDOM REALIZED REALIZED REALIZED
LET’S LET’S LET’S PLAY LET’S PLAY PLAY PLAY A A A A GAME GAME … GAME GAME … … … HYPOTHESES HYPOTHESES HYPOTHESES HYPOTHESES • P P ARTNER ARTNER / S / S / S TRANGER / S TRANGER ARTNER ARTNER TRANGER TRANGER • R ESTART ESTART ESTART ESTART • H OW OW DO DO THEY THEY SHOULD SHOULD REACT REACT ? OW OW DO DO THEY THEY SHOULD SHOULD REACT REACT
LET’S LET’S LET’S LET’S PLAY PLAY PLAY PLAY A A GAME A A GAME GAME GAME … … … … RESULTS RESULTS RESULTS RESULTS
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