Stowaway problem (free rider)

economic-dictionary

The stowaway problem is an economic problem that arises when an individual (stowaway) tries to receive a benefit for using a good or service, but avoids paying for it. It is also known by its English name, free rider problem.

The government tries to tackle stowaway problems through tax rules and regulations. In this sense, to prevent impact on the environment and excessive use of resources.

For this reason, stowaways are also known as parasitic consumers. This is because, on many occasions, they consume goods and services financed by others; for which they paid nothing.

Examples of the stowaway problem

When there are public goods, such as parks, the armed forces, public lighting or the police, stowaways take advantage of the fact that it is not possible to exclude them from consumption. However, they refuse to pay for them.

This creates a provision problem. Since, although many consumers value the services they provide, there will be those who use them, but do not contribute to their financing.

Given the above situation, most of the public goods are supplied by the government. However, they are financed by mandatory taxes applicable to all consumers.

Another example of stowaways occurs when a series of salespeople go out of their way, delivering valuable product information to potential customers. This occurs, for example, in the case of more or less complex products such as computers or telephones. This effort comes at a cost, as it requires hiring trained salespeople or printing brochures.

However, once the information is obtained, the consumer goes to the store of another seller, who makes no effort to provide information and can therefore offer lower prices. In this case, these distributors, who make no sales effort, act as stowaways. This is because they take advantage of the efforts that others have made and stay with the customers.

To avoid the existence of stowaways, in this case, vertical restraints can be used. Such as minimum resale prices or exclusive territories.

Tags:  derivatives famous-phrases administration 

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