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Opinion from a Libertarian ViewPoint

Solving the “Problem” of Free Riding | Mises Institute

Posted by M. C. on January 18, 2022

This kind of analysis has led many economists to conclude that the ancillary benefit from the bees is a “public good” and that, therefore, the neighbors should be forced to contribute to the cost of this good. This is supposed to be justified on the basis that the neighbor will enjoy a benefit that will, according to the economist, outweigh the cost.

https://mises.org/library/solving-problem-free-riding

With the almost constant statist apologetics we hear from many government and academic economists1 it is hard to believe that the discipline of economics was once a thorn in the side of the state and its political elite. So commonplace are fallacious economic arguments advocating state control that it sometimes seems that refutation of all of these arguments has become a case of cutting the heads off the Hydra—a tiring and fruitless endeavor.

But if economics is to become an instrument of freedom and prosperity instead of an instrument of statism,2 then there are certain fundamental fallacies that must be continually challenged and discredited. Chief among these is the persistent non sequitur from externality to coercion—that is, the bogus conclusion that coercion is a proper means to solve problems involving economic externalities.

One of the most blatant examples of this non sequitur occurs in discussions of the “free rider problem” and the alleged solution of government provision of so-called “public goods.”3 This is a particularly insidious economic theory that bears a great deal of the responsibility of derailing economics into the ditch of statism.

The “Problem” of Free Riding

The “free rider problem” occurs in situations in which a person derives a “positive externality” from the actions of another—that is, a benefit that he did not pay for. This occurs in situations where the beneficial effect of an action is “nonexcludable,” meaning that the benefits cannot be withheld from people who had nothing to do with the action.

For example, a beekeeper may keep bees solely as a means of producing honey. However, an ancillary effect of this activity—an externality—is that the bees will pollinate flowers in surrounding properties, benefiting the owners of those properties at no cost to them.4 Nor is there any practical means by which the beekeeper can produce his honey without conferring this benefit on his neighbors. Thus, the “good” provided to surrounding property owners is nonexcludable.

Observe that this situation involves no detriment to anyone, let alone any violation of rights. The beekeeper chooses to buy the bees because he expects to be better off by virtue of this action. Moreover, as an unintended consequence of his purchase, surrounding property owners also find themselves enjoying a benefit from the bees, at no cost to them. This may seem like a fortuitous event—even something to be celebrated.

And yet, there is a “problem”—or, to be more precise, a free rider “problem.” The problem is not that anyone has aggressed against anyone else. It is not that anyone’s rights have been violated. It is not even that anyone has suffered any detriment at all. Rather, it is a “problem” only when compared to what might have been done instead—a problem of allegedly inefficient underproduction of the good in question. In other words, the problem is that, if not for the nonexcludability of the good, things could potentially have been even better.

To illustrate how things might have been better, consider again our beekeeper and his neighbors. If the beekeeper possessed some means to prevent surrounding property owners from benefiting from his bees, without detracting from his own enjoyment, then he would be able to negotiate with them to pay him for the benefit. Since he would then derive an additional benefit from his bees—the payment—he would have an incentive to keep even more bees, benefiting both himself and his neighbors to an even greater extent. Nor is this merely a zero-sum game. Rather, under certain assumptions,5 it turns out that there is some level of payment at which the surrounding property owners would be indifferent between the excludable and the nonexcludable situation, whereas the beekeeper would be demonstrably better off—i.e., there would be a Pareto-efficient gain.6

This kind of analysis has led many economists to conclude that the ancillary benefit from the bees is a “public good” and that, therefore, the neighbors should be forced to contribute to the cost of this good. This is supposed to be justified on the basis that the neighbor will enjoy a benefit that will, according to the economist, outweigh the cost. And yet, regardless of the benefits that they enjoy, it cannot be said that the neighbors have in any way solicited this good or the forced arrangement advocated by the economist. Thus, the essence of this proposal is that the neighbors be forced to pay for an unsolicited good.7 Moreover, this is not merely a special case. Rather, the theory of “public goods” is a doctrine that advocates forced payment for unsolicited goods as a general economic ideal, applicable whenever a person obtains any benefit that is nonexcludable and which does not detract from the enjoyment of the good by others.

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Contact Ben O’Neill

Dr. Ben O’Neill is a statistician and economist.

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