Free Rider Problem

Free Rider Problem

In economics, collective bargaining, psychology and political science, "free riders" are those who consume more than their fair share of a resource, or shoulder less than a fair share of the costs of its production. Free riding is usually considered to be an economic "problem" only when it leads to the non-production or under-production of a public good (and thus to Pareto inefficiency), or when it leads to the excessive use of a common property resource. The free rider problem is the question of how to prevent free riding from taking place (or at least limit its negative effects) in these situations.

In the context of labor unions, a free rider is an employee who pays no union dues or agency shop fees, but nonetheless receives the same benefits of union representation as dues-payers. Under U.S. law, unions owe a duty of fair representation to all workers that they represent, regardless of whether they pay dues. Some jurists have questioned the fairness, if not the legality, of this practice.

Free riding is also a term used by brokerages when a client purchases shares beyond his or her means. Free riders are those who purchase shares and then do not pay for them. (See margin.)