User:Xerographica/Forced rider problem

In economics, the forced rider problem occurs when consumers are compelled to pay prices that exceed the benefits that they derive from public goods.

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.

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. 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. If many people conceal their true preferences, then public goods could potentially be undersupplied. 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, 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.

Examples

The forced rider problem is most often discussed in regards to taxpayers and workers.

Taxpayers

• Pacifists being forced to pay for defense.
• Environmentalists being forced to pay for public projects, such as dams, that destroy the habitats of endangered plants and animals.
• People being forced to pay for food labeling even though they feel that the opportunity costs are greater than the benefits.

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.

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.

See also

• Benefit principle

Passages

• Over time, any individual in the community will expect this rule to produce unfavorable results in particular instances, results that run counter to his own preferences. Public-goods projects which he urgently desires may not be undertaken because a majority of his fellow citizens does not agree with his evaluation. Or, conversely, he may be required to contribute to the costs of projects that he considers to be worthless. - James Buchanan, The Demand and Supply of Public Goods
• We have no idea how much the taxpayers would value these services, if indeed they valued them at all. For example, suppose that the government levies a tax of X dollars on A, B, C, and so on, for police protection—for protection, that is, against irregular, competing looters and not against itself. The fact that A is forced to pay $1,000 is no indication that $1,000 in any sense gauges the value to A of police protection. It is possible that he values it very little, and would value it less if he could turn to competing defense agencies. Moreover, A may be a pacifist; so he may consider the State's police protection a net harm rather than a benefit. But one thing we do know: If these payments to government were voluntary, we can be sure that they would be substantially less than present total tax revenue. - Murray Rothbard, The Myth of Neutral Taxation
• But this argument generates far more difficulties than it solves. It proves too much in many directions. In the first place, how much of the deficient good should be supplied? What criterion can the State have for deciding the optimal amount and for gauging by how much the market provision of the service falls short? Even if free riders benefit from collective service X, in short, taxing them to pay for producing more will deprive them of unspecified amounts of private goods Y, Z, and so on. We know from their actions that these private consumers wish to continue to purchase private goods Y, Z, and so on, in various amounts. But where is their analogous demonstrated preference for the various collective goods? We know that a tax will deprive the free riders of various amounts of their cherished private goods, but we have no idea how much benefit they will acquire from the increased provision of the collective good; and so we have no warrant whatever for believing that the benefits will be greater than the imposed costs. The presumption should be quite the reverse. And what of those individuals who dislike the collective goods, pacifists who are morally outraged at defensive violence, environmentalists who worry over a dam destroying snail darters, and so on? In short, what of those persons who find other people's good their "bad?" Far from being free riders receiving external benefits, they are yoked to absorbing psychic harm from the supply of these goods. Taxing them to subsidize more defense, for example, will impose a further twofold injury on these hapless persons: once by taxing them, and second by supplying more of a hated service. - Murray Rothbard, The Myth of Neutral Taxation
• Since "benefits" are subjective, we cannot measure anyone's benefit on the market either, but we can conclude, from a person's voluntary purchase, that his (expected) benefit was greater than the value to him of the money given up in exchange. If I buy a newspaper for 25 cents, we can conclude that my expected benefit is greater than a quarter. But since taxes are compulsory and not voluntary, we can conclude nothing about the alleged benefits that are paid for with them. Suppose, in analogy, that I am forced at gunpoint to contribute 25 cents for a newspaper and that that newspaper is then forcibly hurled at my door. We would be able to conclude nothing about my alleged benefit from the newspaper. Not only might I be willing to pay no more than 5 cents for the paper, or even nothing on some days, I might positively detest the newspaper and would demand payment to accept it. From the fact of coercion there is no way of telling. Except that we can conclude that many people are not getting 25 cents' worth from the paper or indeed are positively suffering from this coerced "exchange." Otherwise, why the need to exercise coercion? Which is all that we can conclude about the "benefits" of taxation. - Murray Rothbard, The Myth of Neutral Taxation
• Only the free market, then, can determine different qualities or degrees of a service. Second, and even more important, there is no indication that for a particular taxpayer, the government is supplying a "service" at all. Since the tax is compulsory, it may well be that the "service" has zero or even negative value for individual taxpayers. Thus, a pacifist, philosophically opposed to any use of violence, would not consider a tax levied for his and others' police protection to be a positive service; instead, he finds that he is being compelled, against his will, to pay for the provision of a "service" that he detests. In short, equal pricing on the market reflects demands by consumers who are voluntarily paying the price, who, in short, believe that they are gaining more from the good or service than they are giving up in exchange. But taxation is imposed on all people, regardless of whether they would be willing to pay such a price (the equal tax) voluntarily, or indeed whether they would voluntarily purchase any of this service at all. - Murray Rothbard, The Myth of Neutral Taxation
• Voting and other democratic procedures can help to produce information about the demand for public goods, but these processes are unlikely to work as well at providing the optimal amounts of public goods as do markets at providing the optimal amounts of private goods. Thus, we have more confidence that the optimal amount of toothpaste is purchased every year ($2.3 billion worth in recent years) than the optimal amount of defense spending ($549 billion) or the optimal amount of asteroid deflection (close to $0). In some cases, we could get too much of the public good with many people being forced riders and in other cases we could get too little of the public good. - Tyler Cowen, Alex Tabarrok, Modern Principles of Economics
• Morever, many workers consider themselves to be forced, not free, riders. A forced rider is one who receives net harms from some collective action and is nevertheless forced to pay the perpetrators for their activities. Whether a union bestows net benefits or net harms on a worker can only be revealed by the choices he makes as he exercises his freedom of association. - Charles Baird, [The Encyclopedia of Libertarianism Labor Unions]
• When the government offers the good at a zero (or very low) price, it creates free riders - those who are not excluded based on their lack of willingness to pay. In turn, when the government raises tax funds to gain the revenue to provide the service, it creates forced riders - those who pay taxes in excess of the benefit they receive from the service. - Jeffrey Herbener, Austrian Methodology: The Preferred Tax Type
• Second, the government creates a disjunction between the benefit from and payment for their activities. The taxpayer pays and the benefits go to government officials and those who obtain government expenditures. This creates both a class of forced riders and a class of free riders. - Jeffrey Herbener, Austrian Methodology: The Preferred Tax Type
• It does not suffice to retort that the government provides services to the individual; so does the protection racket. The point is that the individual demonstrates that these services are not worth their opportunity cost when he chooses not to purchase them on the market. In addition, the indifference curve technique says nothing about the benefits of government activity, only about burden. This is as it should be since coercion (the method of government) divorces payment for a service from reception of the service - creating forced and free riders. - Jeffrey Herbener, Austrian Methodology: The Preferred Tax Type
• Indeed, the generally ignored problem of the forced rider, from who taxes are extracted but who receives no value in return, may be more severe than the problem of the free rider. - Richard E. Wagner, Public Finance
• The second reason the free-rider argument is false is the problem of the forced rider. Unions claim to confer net benefits on all workers whom they represent. That is nothing but a big lie. For example, the CFA does not confer net benefits on me. To the contrary, I am much worse off having the CFA represent me than I otherwise would be. Just the psychic cost of being forced to have people with whom I have profound educational and philosophical differences speak for me far outweighs any monetary benefits they claim to have secured on my behalf. (Incidentally, I deny that the CFA has secured any monetary benefits for me.) So I suffer net harms from the CFA, and now you want to force me to pay for those net harms through so-called “fair share fees.” In economics a forced rider is a person who suffers net harms from some collective action and is forced to pay for them. There may be free riders, but there are also forced riders. Don’t you, as elected officials, have a moral responsibility to protect the rights of forced riders? We are citizens too. - Charles W. Baird, An Open Letter to the California Legislature
• That a worker should be forced to contribute funds to political causes which he actually opposes seems illiberal and undemocratic to say the least. Nor can union participation in American politics be written off as insignificant. It is indeed a crucial factor in many elections. That a worker impairs the common good when he refuses to subsidize the various undesir­ables who have gained power in the labor union movement is ridiculous on the face of it. It is well to recall in this regard that the Teamsters Union with 1.5 million members is the largest single union in the United States. - Peter A. Farrell, The Case of the Free Rider
• What is not told is that “exclusive representation” (by which a union bargains for all employees in the bargaining unit and not just its own members) was fought for strenuously by the unions on the grounds that if they did not bargain for nonunion workers, the employer could use favoritism toward the nonunion workers as a means of destroying the union . . . therefore it should be pointed out that nonunion workers in an open shop today are not free riders but forced riders since under the Taft-Hart­ley Act they lose their right to bargain with their employer and are forced to bargain through the union. - Edward A. Keller, The Case for Right-to-Work Laws. (Chicago: The Heritage Foundation, 1956)
• The nutritional labeling mandate ostensibly solves the free-rider and high-transactions-cost problems that hinder consumers’ attempts to obtain more nutritional information. However, the political action creates a new class of free riders. The labeling mandate enables those who use the information to benefit at the expense of those who pay and do not use it. It is likely that a minority of consumers benefits from the required (costly) information. Moreover, government action also creates a new class of forced riders. In the example, forced riders are consumers paying higher prices for food who consider the benefit of the additional information to be less than the cost. - E.C. Pasour, Consumer Information and the Calculation Debate
• Legislation considered as a result of a collective decision by a group—even if consisting of all citizens concerned as in the direct democracies of ancient times or in some small democratic communities in medieval and modern times—appears to be a law-making process that is far from being identifiable with the market process. Only voters ranking in winning majorities (if for instance the voting rule is by majority) are comparable to people who operate on the market. Those people ranking in losing minorities are not comparable with even the weakest operators on the market, who at least under the divisibility of goods (which is the most frequent case) can always find something to choose and to get, provided that they pay its price. Legislation is a result of an all-or-none decision. Either you win and get exactly what you want, or you lose and get exactly nothing. Even worse, you get something that you do not want and you have to pay for it just as if you had wanted it. In this sense winners and losers in voting are like winners and losers in the field. Voting appears to be not so much a reproduction of the market operation as a symbolization of a battle in the field. If we consider it well, there is nothing “rational” in voting that can be compared with rationality in the market. - Bruno Leoni, Freedom and the Law
• To the extent that individuals cannot be excluded from a publicly provided good or service once produced, moreover, as is true for socalled pure public goods, persons who are required to pay for the good or service based on their declared willingness to pay might be expected to understate this amount in order to reduce the tax that they would otherwise be required to pay. For this reason, the political process must be relied upon to determine the level and mix of publicly provided goods and services as well as the distribution of taxes that are required to finance these goods and services. The political process, however, is an imperfect mechanism to coordinate the costs and benefits of publicly provided goods and services, as the costs of public expenditures may be imposed on individuals who would not have been willing to pay for the goods and services supplied. - David Duff, Benefit Taxes and User Fees in Theory and Practice
• [Malkin and Wildavsky] (1991:366-7), for example, find it a flaw in free rider theory that 'everybody places the same value on goods'. MW also cite the case of the pacifist to whom expenditures on weapons are a liability, and the anarchist who considers police protection and courts a bad. Samuelson (1955: fn. 1, 1969: 108) had already answered this point. Tanzi (1972) raises the issue of 'forced riders' in which consumers have a negative marginal valuation. In the case of forced riders, those individuals with a negative valuation should pay a negative tax (i.e. receive a subsidy) if a Pareto-optimal allocation is to be achieved. If exclusion, or avoidance, is possible, then forced rider considerations disappear. - Richard Cornes and Todd Sandler, Are Public Goods Myths?
• It is also assumed that a free rider problem exists or that individuals can only be excluded at some positive cost. Loehr and Sandler (1978) consider the issue of a 'forced rider' in which people 'are forced to consume, whether they like them or not', a range of public goods, for example defence. They further comment that 'it is entirely possible that the welfare of some individuals might fall when a marginal unit of the public good is provided' (p. 27). The Pareto optimality conditions would have to allow for subsidies for these individuals to ensure that the marginal utility of tax price rations for all individuals are equal. - Paddy McNutt, The Economics of Public Choice
• This problem becomes particularly acute in that tax policy - as an expediency - does not distinguish between "forced riders" and other public good consumers. A pacifist, for example, must pay the same tax price charged for defense as any other individual, his negative marginal evaluation notwithstanding. - William Loehr, Todd Sandler, Public Goods and Public Policy
• Taking an alternative point of view, however, we see a whole set of public goods that people are forced to consume, whether they like them or not, and this gives rise to the problem of the "forced rider," When the consumer can choose to consume the good or not, no problem arises, since no consumer will choose voluntarily to consume an item which reduces individual well-being. - Todd Sandler, William Loehr, Jon T. Cauley, The political economy of public goods and international cooperation
• Need to get - V Tanzi, A note on exclusion: Pure public goods and pareto optimality
• However, if an individual genuinely has no interest whatsover in the provision of a public good but is still compelled to contribute to the costs he is the opposite of a free-rider; he becomes a forced-rider (Tanzi, 1972). He is forced to contribute towards what he does not want to consume. - Gavin Kennedy, Defense economics
• A second point of broad consensus among critics stresses that publicness in consumption must not necessarily mean that all persons value a good’s utility equally, Mendez (1999), for example, illustrates this point by examining peace as a PG. Some policy-makers might opt for increased defense spending in order to safeguard peace. However, this decision could siphon off scarce resources from programmes in the areas of health and education. Other policy-makers might object to such a consequence and prefer to foster peace through just the opposite measure -- improved health and education for all. Especially under conditions of extreme disparity and inequity, the first strategy could indeed provoke even more conflict and unrest, securing national borders by unsettling people’s lives. - Inge Kaul, Public Goods: Taking the Concept to the 21st Century
• But in the case of PGs they may not have an avenue for criticism nor a feasible exit opportunity. They may be compelled to consume a particular good. Therefore, it is important to ascertain whether a good’s publicness in form goes hand in hand with publicness in substance – actual enjoyment of the good by all. - Inge Kaul, Public Goods: Taking the Concept to the 21st Century
• Every set of institutions and policies tends, of course, to have both functional and dysfunctional effects. While regimes based upon free revelation or upon golden-rule revelation may be subject to some underallocation of resources due to free-riding, the apparatus of collective compulsion entails unintended detrimental side effects on its own. Most notably it results in "forced-riding" by individuals who are coerced into expressing nonexistent "demands" for collective goods. Or worse a "good" in fact may be a bad, in some views, from which it is economically not feasible for the individual to exclude himself, and for which compensation may be appropriate. - Earl Brubaker, Free Ride, Free Revelation, or Golden Rule?
• Forced riding might well be regarded as a clear violation of freedom of consumer choice, a principle so fundamental in modern societies that it is pervasive in the arrangements for private consumer goods exchanges in predominantly plan-oriented as well as in predominantly market-oriented economies. Furthermore under a system of coerced expression of demand for collective goods, demoralizing illusions of forced riding may exist. That is, even if the level and allocation of expenditure on collective goods remained unchanged in conjunction with a switch from a voluntary to a compulsory mechanism, some individuals may suspect that they had lost a valued opportunity to express effectively their own personal evaluation of priorities for collective action. - Earl Brubaker, Free Ride, Free Revelation, or Golden Rule?
• Club arrangements have a number of features distinguishing them from other institutional structures used to allocate resources to public goods. First, there are no forced riders in clubs, since membership is voluntary; those individuals with negative marginal valuations will never join or will exit. - Richard Cornes and Todd Sandler, Are Public Goods Myths?
• The other reason that the unions' free-rider argument fails is the problem of the forced rider -- a worker who experiences net harms from a unions' activities and is nevertheless forced to pay for them. Many workers might get better terms of trade representing themselves or hiring a nonunion representative to do the job. Moreover, while a union may get higher wages for a worker, the worker may so resent the forced association with the union that, on balance, the union makes him worse off. Whether a worker is made better off or worse off by a union's activities cannot be proven. The relevant costs and benefits are subjective. So any worker whom a union labels a free rider, could just as well be a forced rider. The unions' free-rider argument is specious. - Charles W. Baird, Unions and Antitrust
• To resort to blunt coercion in the face of unverified information may lead to unintended deterimental side effects. There could result 'forced-riding' by individuals who are coerced into expressing non-existent 'demands' for collective goods. Worse still, and especially in the case of Abood, some people may regard the 'good' as in fact a bad. - E.G. West, R.J. Staaf, Extra-governmental powers in public schooling
• Third, when government is employed to accomplish group objectives, we often move from a state in which there are free riders to a state in which there are "forced riders." The shift is not necessarily an improvement. - Richard B. McKenzie, Bound to Be Free
• Taxes other than lump sum taxes impose an efficiency cost, i.e., leave the taxpayer with a loss which exceeds the value of revenue which government obtains. In the extreme case, a taxpayer may be burdened while there is no revenue gain: for example, a person may cease to consume a taxed product, leaving the treasury without gain and forcing the taxpayer into a less satisfactory consumption mix. - Richard A. Musgrave, Public Finance
• To those worried about the free-rider problem in private charities, the forthright reply should be, "What about all the forced riders in government charities?" Admittedly, there may always be a need for limited, governmentally sponsored welfare programs. By the same token, one point must be reiterated: the power of government to do good through force has limits. - Richard B. McKenzie, Bound to Be Free
• forced rider: someone who pays a share of the costs of a public good but who does not enjoy the benefits - Tyler Cowen, Alex Tabarrok, Modern Principles of Economics
• Of course just because everyone can be made better off by taxation does not mean that everyone will be made better off. Some people want more national defense, some people want less, pacifists want none. So, taxation means that some people will be turned into forced riders, people who must contribute to the public good even though their benefits from the public good are low or even negative. - Tyler Cowen, Alex Tabarrok, Modern Principles of Economics