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B. Venkatesh

PENGUINS like fish. But whales like penguins. So, penguins have to be careful when they fish, lest the whales eat them. These birds adopt a strategy to lower this risk. They wait patiently for someone in the group to make the first move. If the penguin that makes the first move is still alive, others immediately jump to fish.

What has this got to do with economics? It is called the "free riding" problem. This problem arises because people who enjoy benefits do not bear the cost of utilising such benefits.

You may experience this problem if you live in an apartment. Suppose there are 10 apartments in your block. Assume two families do not pay the monthly maintenance charges. These two families will still enjoy all the benefits that are available to others. The two families can be called "free riders".

The free rider problem is typically associated with goods that can be used by all individuals. That is, you cannot deny others the access to such goods. In economics, such goods are termed public goods. The air we breathe is a public good. A free rider problem exists because we do not bear the cost for polluting the air.

Traditionally, a government attempts to minimise the "free rider" problem through taxes. For instance, companies whose manufacturing process is polluting may be asked to pay pollution taxes.

But a free rider problem cannot be completely avoided. A government may instead strive to maximise the value derived from public goods. That is, those who derive value from a public good should be able to compensate for the cost borne by others. This outcome is referred to as the Kaldor-Hicks efficiency, named after two UK-based economists. It essentially means that a government will do a cost-benefit analysis to overcome the problem.

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