Forced rider
In economics, the forced rider problem occurs when consumers are compelled to pay prices that exceed the benefits that they derive from public goods.[1]
Overview
It's presumed in economics that individuals are utility maximizers. In other words, people want the most bang for their buck. This means that consumers prefer paying less for all goods/services both public and private.[2]
Unlike private goods, public goods are non-excludable and non-rivalrous. This means that it's possible for people to benefit from a public good without helping to cover the costs of production.[3] Because only individuals know exactly how much they value a good, it's argued that they will maximize their utility by understating their valuations of public goods.[4] If many people conceal their true preferences, then public goods could potentially be undersupplied.[5] This is known as the free-rider problem.
Compulsory payments are generally used to try and solve the free rider problem. However, because of the preference revelation problem, compulsory payments create situations in which the opportunity costs may be greater than the benefits. Given that government planners do not know the actual demand for public goods,[6][7][8][9] in terms of achieving Pareto optimality, it's possible that the forced rider problem might be even a bigger problem than the free-rider problem.[10][11][12]
Examples
The forced rider problem is most often discussed in regards to taxpayers and workers.
Taxpayers
- Pacifists being forced to pay for defense.[13][14][15][16][17]
- Environmentalists being forced to pay for public projects, such as dams, that destroy the habitats of endangered plants and animals.[18]
- People being forced to pay for food labeling even though they feel that the opportunity costs are greater than the benefits.[19]
Workers
If individual workers are compelled to pay union dues, then they become forced riders if they believe that they would have benefited more from self-representation.[20][21]
Solution
In order to determine the actual demand for public goods, one possible solution would be to implement tax choice. If taxpayers had to pay taxes anyways, but they could choose where their taxes go, then, again presuming utility maximization, they would have an incentive to allocate their taxes according to their true preferences. In theory this would result in a Pareto optimal provision of public goods.[22]
See also
References
- ^ Austrian Methodology: The Preferred Tax Type
- ^ A Spoonful of Choice
- ^ Providing Global Public Goods
- ^ Multipart pricing of public goods
- ^ The Encyclopedia of Libertarianism
- ^ Kennett, Patricia (2008). Governance, globalization and public policy. Edward Elgar Publishing. p. 28. ISBN 978-1845424367
- ^ Public Goods and Public Choices
- ^ User Charges for Public Services: Potentials and Problems
- ^ Ethical Dimensions of the Economy
- ^ The Myth of Neutral Taxation
- ^ Bound to Be Free
- ^ Public Finance
- ^ The Myth of Neutral Taxation
- ^ Public Goods and Public Policy
- ^ Public Goods: Taking the Concept to the 21st Century
- ^ Are Public Goods Myths?
- ^ Modern Principles of Economics
- ^ The Myth of Neutral Taxation
- ^ Consumer Information and the Calculation Debate
- ^ Unions and Antitrust
- ^ The Case of the Free Rider
- ^ The Economics of Earmarked Taxes