Addressing the Free Rider Problem and the Privatization of Public Services

Understanding the Free Rider Problem

The Free Rider Problem suggests that individuals might avoid paying for public goods because they can benefit from them without contributing. This behavior could lead to inefficiently low levels of public goods, which is why some argue that government provision is necessary.

Government Intervention and Ideal Solutions

The government can solve the free rider problem by discovering everyone's true preferences and using its authority to make everyone pay for public goods. If the government can do this perfectly, public goods will be provided efficiently.

However, this ideal scenario is based on the assumption that people only act to maximize their own consumption and may not reveal their true preferences honestly. While public goods are sometimes underprovided because of this, there are many cases where people voluntarily come together and fund public goods without government force. Examples of successfully privately provided public goods include:

• Churches
• Libraries
• Hospitals
• Lighthouses

The significance of the Free Rider Problem (FRP) depends on real-world evidence rather than being taken as an absolute fact. Some public goods are privately provided adequately, while others may not be, or are provided in insufficient quantities.

Experimental Evidence on Contribution Behavior

Laboratory experiments have tested the FRP using games where participants decide whether to contribute tokens to a group fund or keep them for personal gain.

Experiment Setup and Results

Setup:

Each token kept gives a participant a personal payoff (e.g., $4), while each token donated benefits everyone in the group equally (e.g., $3 per person), including the donor.

Predicted Behavior:

Free rider theory suggests participants might contribute nothing and still benefit from others' contributions.

Actual Results:

People typically contribute about 50% of their tokens—showing some free riding but not complete refusal to contribute.

Important Patterns Found

1. Contributions decline the more the game is repeated.
2. Communication before the game increases cooperation.
3. Contributions decrease when the personal cost of giving increases.

Conclusion on Free Riding

While free riding does occur, it does not usually eliminate contributions to public goods. People may also gain a “warm glow” or personal satisfaction from giving, which motivates them beyond narrow self-interest.

The Privatization Debate

Privatization means taking services that are currently provided by the government and transferring them to the private sector for provision and/or production.

Public Versus Private Provision

Sometimes, services that are typically seen as public can also be obtained privately. For example, the service of protection can come from a public police force, but it can also come from private alternatives, like strong locks, home alarm systems, or even bodyguards.

In the USA, there are three times as many private security guards as public police officers.

Historical Context of Responsibility

Throughout history, the balance between public and private provision has changed. In the 19th century, there was more private responsibility for education, policing, libraries, and other services. Today, however, there is a trend toward returning some of these responsibilities to the private sector.