Free Rider Problem - Example

Example

Suppose there is a street, on which 25 people live, and which suffers from a litter problem. A weekly street-cleaning service would cost $2,500 annually. Suppose that each person is prepared (i.e., able and willing) to pay $100 or more for the benefit of a cleaner street.

If the service is engaged, everyone will benefit. However, it is possible that some people on the street will refuse to pay, anticipating that the service will be undertaken in any event.

Despite the fact they may be prepared to contribute $100, they will claim that they are not prepared to pay, and instead hope that others in the street will pay for the system anyway, and they receive the benefit for no personal expense.

The result is that it is possible no system will be installed, an example of market failure. This is despite the fact that allocative efficiency would be improved.

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