Our weekly explainer on economics using lessons from popular culture. In Installment 41, The Office faces the Free-Rider Problem.
In the finale of season 4 of The Office, a show revolving around the daily ongoings of a humdrum office, one of the characters, Jim, contributes several hundred dollars to the party-planning fund in order to buy fireworks at a colleague’s (Toby) farewell party so that he can propose to his girlfriend and colleague, Pam, reminiscent of their first date. Pam notices the purchase and guesses his intentions but keeps mum.
However, at the party, before Jim can get on with the proposal, another colleague (Andy Bernard) jumps the gun and proposes to his girlfriend and you guessed it, colleague, Angela, who bitterly accepts. Not wanting to be a “me-too”, Jim slides the ring back into his pocket, crushing longtime fans’ and Pam’s expectations.
Now, a couple of important but overlooked economic concepts are at work here.
Firstly, when Jim arranges the fireworks, he creates a positive externality for everyone present at the party and within visibility range. A positive externality is when the production and/or consumption of a good or a service has a positive effect on unrelated third parties.
Secondly, fireworks are also a common example of a pure public good since they are both non-rival (their consumption by one person doesn’t threaten/prevent the consumption by others) and non-excludable (it is impossible to exclude an individual from consuming the good). Pure public goods include national and civil defence, traffic signals, lighthouses, official statistics, open source information among others.
Going back to Toby’s farewell party, Jim couldn’t stop Andy from “free-riding” and using what was meant to be Jim’s moment as his impromptu proposal without contributing to its production.
The Free-Rider Problem is an inefficient supply-demand allocation situation that occurs when people take advantage of being able to use a common resource, or collective good, without paying for it, as is the case when people patronise a coffee shop for their Wi-Fi connection and not their coffee, thereby blocking seating space for somebody who might’ve also brought some business to the cafe.
Free-riders operate in any system because of a person’s pursuit of self-interest that makes them want to benefit from common-pool resources without contributing an appropriate share. The problem is that if enough people behave in this same way, collective action can become difficult to sustain and lead to the Tragedy of the Commons.
Eating out in a group presents the most commonplace setting for observing how the free-rider problem manifests itself. If the diners split the bills equally, it provides an excellent opportunity to try the fancier options by free-riding on the backs of fellow diners at a subsidised cost.
In 2004, Uri Gneezy, Ernan Haruvy and Hadas Yafe conducted an experiment in a restaurant in Haifa, Israel, inviting groups of six diners to order food but giving them different systems for settling the bill; either splitting the bill or paying individually for what they’ve ordered. They, unsurprisingly, found that the subjects consumed more in the former arrangement, and that they were even aware of this pattern of behaviour and preferred paying individually to the inefficient split‐bill method.
Even in the matter of labour unionization, this problem rears its ugly head. If there is a union that’s negotiating with the management, labour laws require that the resulting benefits be provided for all the workers, regardless of their membership in the union. Hence, there are always demands from unions regarding some kind of rule that makes it mandatory for everybody hired to join the relevant union and pay its membership fees.
One of the interesting stories about the alleged origin of the term “free-rider” attributes it to the days of cattle rustling in the Old West in North America. In his Intermediate Microeconomics textbook, Heinz Kohler wrote:
The ranchers of Dodge City banded together to form a vigilante group to catch (and hang) cattle thieves. Everyone contributed to the cost of the security force on horseback–that is, until rustling had been sufficiently discouraged by the existence of this group. Then individual ranchers began to withdraw, realizing that they could benefit as much if they didn’t pay. They became “free-riders” instead. Before long, the security force collapsed, and cattle rustling resumed.
As to dealing with this problem, there are some novel solutions. Pure public goods are more often than not in the domain of the government since their very nature makes them prone to the problem of free-riding and the markets fail to deliver. This is the most popular and widely-applied solution by far globally: to make the government responsible for providing public goods and hence bear the cost of the free-rider problem. Some other measures have also cropped up. Places offering free Wi-Fi (though nothing is ever “free”, it’s generally added to the prices implicitly) have taken to a “freemium” model wherein they provide free Wi-Fi for a specific period of time and then charge for it post that. Appealing to people’s altruism is another suggested solution with a limited scope of success. Caltech neuroeconomists suggest scanning people’s brains for matching their stated preference with their actual preferences and charging them accordingly.
The last suggestion seems the most exciting, only until somebody wants to demonstrate it on me after I order the most opulent, decadent dessert the next time I’m out with friends.