Answer to Question #280795 in Macroeconomics for Abhi

Question

. What is free-riding? Why do self-interested players free-ride? Explain via an example.

Answer 1

Free riding is a benefit received or obtained at the expense of someone else or without the usual cost or effort. It occurs when one individual or film benefits from the action of another without paying or sharing the cost.

The prisoner's dilemma game can be used to express the free rider problem. Assume Mary and Raphael are thinking about doing something good for the community. When either of them contributes to a public good, such as a local fire department, the personal cost is $4 and the social benefit is $6. Because the benefit to society of $6 outweighs the cost of $4, the investment is a good idea for society as a whole. The problem is that, while Mary and Raphael pay the full cost of their contribution to the public good, they only receive half of the benefit because the benefit of the public good is distributed equally among society's members.

There are no costs or benefits of the public good if neither Mary nor Raphael contribute to it. Assume, however, that Mary is the only one who contributes and Raphael is not. Mary incurs a $4 cost but receives only $3 in benefit—half of the total $6 in societal benefit. Raphael incurs no expenses, but he also receives a $3 benefit. In this case, Mary loses $1 while Raphael gains $3. If Raphael had contributed but Mary had not, the outcome would be similar, but the roles would be reversed.

Finally, if both parties contribute, each incurs a $4 cost and receives a $6 benefit, accounting for half of the total $12 benefit to society.