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Free Rider Problem in Practice

Business Management Faculty, Finance Major.Public FinanceProf., Dr. Tatiana PapiashviliBy: Nino Bazhunaishvili

09/10/13

Contents

Free Riders Problem

1 Public Goods

2

Problem Solution3

Public Goods

Collectively consume

1. One person’s consumption does not prevent another person

It is impossible to exclude one to derive benefit

Public goods

Public Good

Public Good

non – excludabletheir benefits are available to anyone, regardless of whether they have contributed to the cost of providing them...

non- rivalrous

A type of good that may only be possessed or consumed by a single user.

Public Goods

fresh air, systems

Knowledge, lighthouses

national defense, flood control

sewer systems, public parks

radio broadcasts,  

Contents

Free Riders Problem

1 Public Goods

2

Problem Solution3

Free Riders Problem

In economics, the free rider problem refers to a situation where some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource.

Free Rider Problem

1Someone who sneaks into a concert, baseball game or the like without paying admission.

2

A member of a club who goes to all club events without contributing to the club's annual fund drive or, even worse, not helping to clean up the mess after each party.

4occurs if an employee pays no union dues or agency shop fees, but benefits from union representation.

3Someone who markets a new product without paying royalties

Contents

Free Riders Problem

1 Public Goods

2

Problem Solution3

Solution

SolutionOf

Free rider problem

MarketRegulatory

Solution

Regulatory solutions to free riding take the form of union security practices

The (pre-entry) closed shop, the hiring hall and the preferential shopThe union shop (post-entry closed shop) and maintenance of membership agreementsThe agency shop (compulsory bargaining fees)

Free Rider Problem

Market solution :

Assurance contracts Coasian solution Government provision Subsidies and joint products Privileged group Merging free riders Introducing an exclusion mechanism (club

goods) Social norms

Solution( assurance contract)

An assurance contract is a contract in which participants make a binding pledge to contribute to building a public good, contingent on a quorum of a predetermined size being reached.

Solution( coasian )

The coasian solution, named for the economist Roalnd Coase, proposes a mechanism by which potential beneficiaries of a public good band together and pool their resources based on their willingness to pay to create the public good

Solution (Public Provision)

If voluntary provision of public goods will not work, then the obvious solution is making their provision involuntary. This saves each of us from our own tendency to be a free rider, while also assuring us that no one else will be allowed to free ride.

Solution

Subsidies and joint productsA government may subsidize production of a public good in the private sector.

Privileged groupThe study of collective action shows that public goods are still produced when one individual benefits more from the public good than it costs him to produce it; examples include benefits from individual use, intrinsic motivation to produce, and business models based on selling complement goods. A group that contains such individuals is called a Privileged group.

Solution

Merging free ridersAnother method of overcoming the free rider problem is to simply eliminate the profit incentive for free riding by buying out all the potential free riders.

Introducing an exclusion mechanism (club goods) to introduce exclusion mechanisms which turn public goods into Club Goods. One well-known example is copy right and patent laws.

Social normsIf enough people do not think like free-riders, the private and voluntary provision of public goods may be successful.

BIBLIOGRAPHY

http://www.investopedia.com/search/default.aspx?q=non-excludable

http://en.wikipedia.org/wiki/Public_good#The_free_rider_problemhttp://www.slideshare.net/aquinaseconomics/public-goods-24530

101?from_search=1http://newunionism.wordpress.com/2012/09/30/conor_cradden/http://www.who.int/trade/glossary/story041/en/index.htmlhttps://www.google.ge/search?q=benefits+of+a+public+good&ne

wwindow=1&rlz=1C1SNNT_enGE485GE485&es_sm=122&source=lnms&tbm=isch&sa=X&ei=umRUUqvHJomQ7AbWlICwCA&ved=0CAkQ_AUoAQ

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