Free-rider problems can be serious impediments to good management of environmental or natural resource assets. The example of milk in the office fridge illustrates many of the issues.

Economists recognise free-rider problems as one of the most important fundamental causes of environmental degradation or resource over-exploitation. Free-rider problems are closely tied to one type of public good: non-excludable goods, and to the issue of weak property rights.

Suppose there is an unregulated fishery where one of the fishers is worried that the level of fishing effort is excessive. This fisher thinks about cutting back on fishing effort in order to allow fish numbers to grow, so that fish catches will be higher in future. The problem is that this fisher cannot stop other fishers from stepping in and increasing their own effort in the area where the first fisher was previously working. The incentive for any individual fisher is to free ride on the benefits from conservative fishing behaviour by others. The result is that no individual has any incentive to fish conservatively, and so most commercial fisheries in most countries are badly over-exploited.

Closer to home (for many of us), consider the issue of milk being provided for tea and coffee in the workplace. If there is no coordination of milk provision, then any individual who buys a carton of milk for themselves and leaves it in the office fridge faces the risk that others in the workplace will free-ride, using up milk without contributing fairly themselves. What’s to stop others from putting your milk in their coffee, or even drinking a whole glass of milk when they feel like it? You can’t stand guard over the fridge, and it isn’t worth buying a fridge of your own to keep in your office just for your milk. The risk is that nobody will provide any milk, so that everybody will be worse off.

Free-rider problems, if they are serious enough, may be worth managing by some authority taking control and closely directing the behaviour of the people involved. In a fishery, a government may institute a quota system, and exclude people who don’t hold quotas from fishing. In the office, the boss may decide to be generous and provide milk for all workers, or (less generously) to levy people and use the funds to buy milk. Alternatively the boss may organise a rotation system where people take turns to buy milk. I have seen each of these in operation in practice, but they don’t necessarily happen (just as fisheries are not always regulated).

I work amongst resource economists. You’d think that, as a group, we’d know a thing or two about managing free-rider problems, but I started to have doubts when I learned about the milk situation in our School. I don’t drink milk at all myself, but in a coffee-break discussion the other day, I learned that our office milk is completely unregulated. It appeared that this lack of regulation is causing a free-rider problem. It came out in the discussion that there are two or three people in the School who are regularly purchasing milk, and finding that some of their colleagues in the School are helping themselves to it. The situation seemed to cry out for a regulatory solution of some sort.

However, on closer inspection, it emerged that the situation was not so simple. People had responded in a variety of ways, such that the additional (marginal) benefits of a regulatory solution would probably be small – possibly not large enough to outweigh the costs.

It was interesting to see how different people had adopted different strategies. Within our small group, individuals reported a remarkable diversity of strategies:

• Switching to drinking their tea or coffee without milk. This was quite a common strategy. Having made the switch and become used to it, the cost to these people was minimal.
• Buying soy milk, on the basis that people are less likely to free ride, given that many people don’t like soy milk. The person who did this was quite happy with soy milk.
• Buying UHT (long-life) milk, using the same logic as for soy milk.
• Only bringing in enough milk for one day.
• Bringing in milk in a distinctive container, such as a sturdy plastic container.
• Writing the owner’s name on the milk carton. This was reported to be only partially successful.
• Purchasing normal milk but putting the carton inside a plastic bag and placing it low down and at the back of the fridge. For some reason, this seemed to be more successful than the name-labeling strategy.
• Forming a cooperative, where a group of people agreed to take turns at buying milk. This doesn’t completely solve the problem as there are still milk drinkers (potential free riders) outside the cooperative. However it does somewhat reduce the risks, the more so the larger the cooperative. Unfortunately the cooperative in our School was actually very small – just two members.

These two members and one other person purchased most of the School’s milk. All three were well aware that they were bearing a cost due to free riders. Two of the three even named one other person (the same person in each case) as a particularly bad free rider.

However, I was interested to note that they took no steps to attempt to reduce free riding. They did not approach the worst offender. They did not petition the Head of School or School Manager to institute some sort of regulatory system, and they did not organise some peer-pressure-based system themselves. They also did not use any of the strategies employed by other members of the School, such as using a distinctive container. There were several reasons for this:

• If they took steps to reduce free-riding, the cost to them in awkward feelings or in time would not be trivial.
• The benefits to them from resolving the problem did appear to be trivial, or nearly so. The cost of the free riding was said to be low and not worth getting bothered about. Milk, after all, is not all that expensive, and the level of free riding was tolerable. The marginal value of the second half of a carton would be close to zero. If only one person was drinking it, it may go off before it has been completed. With this in mind, it was easy to tolerate free riding.

Overall, after discussing the issue with most people in the School, I concluded that the free-rider problem was not that serious in this case. Those who were bothered by it had adopted effective strategies to avoid it, and those who were not bothered by it just bought the milk. These strategies were clearly superior (in the minds of these people) to the option of any one of them attempting to negotiate and enforce a strong common-property solution. And the current head of School (in common with the previous three) clearly did not consider it to be an issue of sufficient importance for it to be worth the costs of him intervening. (This was in contrast to the situation with the fridge itself, which was provided by the School for all to use, as happens in most offices. I suppose that, since a fridge is relatively expensive, the need for a coordinated solution is greater.)

I was struck by the parallels with the writings of economist Ronald Coase. Coase argued that market failure problems such as free riding are often not as serious as we tend to think, and that if we look closely, we may see that they actually have been addressed to some extent. If you factor in the transaction costs of making changes, the case for a more interventionist approach may not be strong. For example, when lighthouses were put forward as the archetype public good, with high risks of free riding to be faced by any shipping company that builds them, Coase (1974) investigated and found that prior to the mid 19th century in England, lighthouses were privately owned, operated and funded (see here). This showed that, in some circumstances at least, people can work out ways to get around free riding.

Any attempt to alter such a system runs the risk of making it worse, at least for a time. For example, as a result of my interviews, and a frank discussion I had with the School’s worst free rider, we ended up with an excess supply of milk in the fridge. No doubt, this will work itself out in time, but until then we may see an increase in milk wastage.

I’m not saying that a coordinated solution is a bad idea. If some community-minded person in the School did organise and operate a coordinated system, it probably would be better than the current arrangement. Just not as much better, overall, as you might have expected.

David Pannell, The University of Western Australia

Further Reading

Coase, Ronald H. (1960). “The Problem of Social Cost”. Journal of Law and Economics 3: 1–44.

Coase, Ronald H. (1974). “The Lighthouse in Economics”. Journal of Law and Economics 17: 357–376.