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Posts Tagged ‘free rider’

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

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Why Don’t Pro-Tax Millionaires Just Pay More Tax Voluntarily? | Mises Wire

Posted by M. C. on February 29, 2020

This argument has led to the conclusion that we need government, and its ability to coerce people, to tax us (more than we would have voluntarily given) to force us to give “what we really want to give,” which could make the “donors” better off despite the coercion involved.

https://mises.org/wire/why-dont-pro-tax-millionaires-just-pay-more-tax-voluntarily?utm_source=Mises+Institute+Subscriptions&utm_campaign=77b845adc2-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-77b845adc2-228343965

One need not look far for evidence that many Americans want to help the poor. One obvious piece of that evidence is that many give substantial amounts of time, effort, and money to do so. But given that evidence, why do we need government to be so substantially involved in redistribution, backed by coercion, rather than relying on individuals and voluntary associations to provide charity?

One argument that has been made involves the free rider problem, the argument that leaving charity to voluntary efforts would result in less charity than we “really” want to contribute. In a nutshell, the problem is that my personal contribution, at most, will have virtually no effect in reducing poverty, so that even though I want to do something about it, I don’t contribute because the problem of poverty is so large relative to my resources.

This argument has led to the conclusion that we need government, and its ability to coerce people, to tax us (more than we would have voluntarily given) to force us to give “what we really want to give,” which could make the “donors” better off despite the coercion involved.

I have long thought this was an unsatisfying argument with several problems. As E.C. Pasour wrote, “The free rider concept…has also been widely misused in the case of charity.” In particular, although it is true that my potential contributions are far too small to appreciably reduce the existence of poverty, which could potentially trigger a free rider problem in reducing poverty, my potential contributions are large enough that I can do something about the poverty of a particular person or group I encounter or discover. I can make an appreciable difference to them. For such circumstances and choices, the standard free rider story for why I don’t give would not seem to apply, unless people are assumed to care about poverty but not about those poor individuals they encounter or discover, which seems a very odd combination of preferences. We can also join with others in groups, where our contributions are more impactful in particular areas (this was, in fact, one of the primary principles at a church where I was in charge of charitable giving for years).

However, that is not the biggest problem I have with the “government coercion makes us give what we really want to” argument. To the extent that the free rider problem does arise, it is true that government intervention can change how much charity is provided, but the result is not necessarily closer to what we “really” want to give than what we give voluntarily. A big reason for this is what is called expressive voting.

Say there was a (wildly optimistic) one-in-a-million chance that your vote would swing an electoral outcome to a result benefiting you by $10,000. Viewed instrumentally—solely as a means to an improved end—the expected value of that vote is one cent ($10,000 divided by 1 million). Such a small payoff cannot explain choosing to vote, much less adamant support for a particular candidate or measure. If the payoff in the same circumstance was $1 million, its instrumental value would be one dollar ($1 million divided by 1 million), which would generate virtually identical results.

However, people often also care about the expressive value of voting—what they feel their vote says about them. They might want to vote for something because it makes them feel better by, say, embellishing a noble self-characterization or “cheering” for a position they wish to be associated with. For instance, a vote could validate one’s sense of self-worth by illustrating that “I care,” “I am patriotic,” “I am not a racist,” “I am not selfish,” etc.

Consider one of the “1 percent” who is faced with a vote on whether to raise taxes on “the rich.” With a one-in-a-million chance of changing the electoral outcome, the expected instrumental cost of voting to raise their own taxes by $1 million is one dollar. Therefore, if the value of demonstrating their generosity to themselves and/or others by voting for the proposition exceeded one dollar, such voters would benefit (i.e., advance what they care about) by voting against their instrumental self-interest.

So, once we incorporate this expressive motive for voting, can we be sure that someone’s vote for a proposition that would give $1 million to government poverty efforts from their own pocket (i.e., $1 million would be their share of the tax bill) more closely matches how much they “really want to give” than what they actually choose to do with their own resources? No. There are likely many people who would be willing to bear an expected additional burden of one dollar to vote for giving their $1 million share of such a tax but who would not be willing to actually donate $1 million of their own money for the same end. In other words, the cost of voting to give that $1 million is far lower than the cost of actually giving $1 million, and that artificially low price makes me willing to vote for giving far more charity than I want to give to charity. Like any other subsidy, it makes me do too much of something due to the law of demand.

As a result, can we say that how much charity I would vote for (my share) is a more accurate indicator of what I want to do than what I actually do with my own money? Since I am not convinced that the free rider effect on charity is very large but think that the massive effective subsidy inherent in expressive voting would be quite large, I think the answer is no. Even if free riding does exist to some extent, I think that what we actually do with our money is a more accurate indicator than what we vote to do with it. In fact, I find it highly plausible that such voting on charity could make people far worse off. And that “solution” to the free rider problem would also make government massively larger, which is seldom an effective means of advancing our well-being.

I think this verdict accords with the Constitution, which does not mention a federal role in charity, and its widely accepted meaning earlier in American history. As Grover Cleveland said roughly a century after its signing, in vetoing federal aid to drought-stricken Texas farmers:

I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit….The friendliness and charity of our countrymen can always be relied upon to relieve their fellow-citizens in misfortune….Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthen the bond of a common brotherhood.

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1/20/2013: I’m from the government and I’m here to help

 

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