Written by: Jacob Stern
Weighing the “Free Rider” Problem: The Costs and Benefits of a Command Economy
The term “free rider” is most often found in reference to the failings of a completely market-driven economy. In the market economy, because of uncontrollable positive externalities, in a free market we may find that many necessary goods and services are un-provided for. However, it would seem that in the command economic system, the free rider problem becomes much more prevalent, because no one has incentive to work. In determining the most effective economic structure, the ultimate question is whether or not the benefits of having public goods controlled by the government outweigh the sacrifice of market freedom and flexibility of the market system.
A free market economy is widely regarded as the optimal scenario, as deregulation allows for freedom to innovate and build a business. Because all individuals are acting in self interest, it is also a very efficient form of economics; people are incentivized to provide for their own wellbeing and standard of living. However, in some industries, there isn't enough profit-driven incentive to sustain necessary infrastructure. This is known as the free-rider problem. Some of the common industries in which the government steps in include internal improvement projects (i.e. roads), public education (university system), and the common defense. These are necessary for the government to take on because none of these are profitable for profit-driven businesses. They are unprofitable because the positive externalities are uncontrollable. For example, maybe 30% of the people of the U.S. decide they don’t want to have a department of defense. Well, the other 70% still need a military, and so it’s provided. But if this were to be taken on by a private company, it would be unprofitable because 30% of the populous still benefits in spillover from the other people’s purchase. There would be no incentive to pay for it. Because the maintenance of a military is widely regarded as a universal need, it is taken on by the government and we share the cost.
A command economy has a similar structure to the scenario previously described. However, in this system, every single industry, good, and service is government supported. This works great in that every necessary service is supported. But there are far more problems with it than there are solutions. First, while every necessary service is taken care of, there will always be problems that the government “solves” that would be better left alone in the first place, problems that become black holes for money. Even in our economy, which is primarily a market economy, we run into these kinds of issues. It’s called pork barrel spending – when we throw “extras,” or incentives, into a bill to get it passed. This is a source of a great amount of public waste. Secondly, the government, no matter how much money is funneled into it, can never be as efficient as a private enterprise. Due to the lack of incentive, the system of personal accountability upon which the market system is based, becomes much less and effective.
In a mixed economy, we have a nice balance of the command and market systems: we have the flexibility of a free market, but the government does step in and take control of broad scope issues. The balance of private wealth and private interest with government support for non-profitable industries allows for optimization of the economy through the stimulus of public funding (esp. infrastructure), but maintains measures (private property) to ensure incentives that foster entrepreneurship and innovation. A mixed economy is by far the most effective in facilitating industry, progress, and growth, while ensuring that essential “nonprofitable” functions remain funded.
"Free rider problem - Wikipedia, the free encyclopedia." Wikipedia, the free encyclopedia. N.p., n.d. Web. 22 Sept. 2013. <http://en.wikipedia.org/wiki/
"Microeconomics- the Free Rider Problem." McGraw Hill. N.p., n.d. Web. 18 Sept. 2013. <highered.mcgraw-hill.com/
"The Free Rider Problem (Stanford Encyclopedia of Philosophy)." Stanford Encyclopedia of Philosophy. N.p., n.d. Web. 22 Sept. 2013. <http://plato.stanford.edu/
I agree that a mixed economy allows for the most efficient use of resources, and provides incentives to workers. However, as you stated in a mixed economy and even in a free market people still become “free riders” in various ways. There is no system that will completely eliminate the “free rider” problem, which is why society members just act in their own best interest, whether a free rider or not.
ReplyDeleteI agree with Collin that there really is no perfect solution to this problem, there will always be people that truly try to gain the benefits that someone else enjoys because of the price they paid for it, without putting forth the capital or work themselves. It’s too bad, but like you said Jacob, our mixed economy seems to be the best way to balance out this issue right now.
ReplyDeleteThis post brought up an interesting problem that many countries are facing today. I think the only thing that I would add is possibly a real world example where the government overstepped their boundaries in a command economy would add some depth to this piece. Overall though, I found it extremely well done in the way that you juxtaposed the two systems. Very well done!
ReplyDeleteJacob,
ReplyDeleteFor the most part, I feel like you very clearly and effectively validate our economic system. However, I disagree about what you said about porkbarrel spending. Often times, minor projects which individual states need funding for would never get done unless grouped with the more major issues. Thus, although our market economy is the most ideal we've found so far, there are ways we can continue to improve it.
You did a really good job explaining the three different type of economies. You clearly defined each of them and listed the pros and cons. I really liked that you ended your post stating your belief and why. I also agree with you, the mixed economy is the perfect inbetween of the other two market types. Well done.
ReplyDeleteI agree with you when you say that mixed economy is the best in facilitating industry, progress and growth. I also agree with how you say the government will never be as efficient as a private enterprise. I think if you would have added in an example to that part of the essay it would of been a good edition to get your point across! Overall good job you covered everything well.
ReplyDeleteI am not surprised that many are taking advantage over these public goods because essentially as humans we want to pay as little as possible or in this case none at all. I believe that it is important for a government to step in and take responsibility because as self interest driven citizens we are only looking out for ourselves while the government is focused on a whole, or the majority at least. Even if there are free riders in our economy it is not like anything can be changed from the system to try and stop them. The only one who can change the free rider problem is the free rider themselves.
ReplyDelete