Freeriders and parasitism in economy

Accounting for Externalities > English > Freeriders and parasitism in economy

Mistletoe is a parasitic plant. It attaches itself to its host (tree), to absorb its sap. Its crime can even lead it to kill, when its host is fragile (like the almond tree).

Mistletoe is a freerider who cares very little about the next day (the day when its host, its source of life, succumbs).

In economy, free riders can be assimilated to thieves, nevertheless, we must absolutely take away the cool and ecological aspect from them.
Let’s quickly see why!


Free riding is a problem of economic inefficiency when it leads to the underproduction or overconsumption of a good. Free-riding property is generally characterized by the inability to exclude non-payers.
Indeed, if non-payers can be excluded by some mechanism, the good may be transformed into a club good (for example, if an overused and congested public road is converted into a toll road, or if a free public museum is converted into a fee-paying private museum).
Free ridership develops because of the existence of externalities. The presence of externality (good / nuisance, without transactions) allows the development of this phenomenon of parasitism. Thus the free rider is an opportunist who, by exploiting an advantageous economic situation, will generate a nuisance for the community (negative externality).
This problem is sometimes aggravated by the fact that common goods are characterized by rival consumption. Not only can consumers of common goods benefit without paying, but the consumption of one imposes an opportunity cost on the others. This leads to over-consumption and eventual exhaustion or destruction of the commons. If too many people start free riding, a system or service will eventually run out of resources to operate. Free riding occurs when the production of goods does not take into account external costs, particularly the use of ecosystem services.
As an example we can talk about the Arizona Green Golf Course. Indeed, the use and waste of certain natural resources generates a depletion of the resource that is not valued at its fair price: these golf courses have been able to develop thanks to a low cost of water compared to the limited water resources. The social counterpart is the development of tourism, but the contribution of this development remains low in view of the long-term impacts that this type of activity can have. A higher cost of water would not have allowed the development of this type of activity, and the resource could have been conserved. 

Free riders as individuals

According to Hirschman, the free rider problem is not constant and fluctuates according to people’s interest.
So Hirschman’s idea is to say that in a stressful environment (my individual interest is declining), people move into the public sphere, and seek public interest, with less free-riding. Then as soon as this feeling is satisfied, they return to an individualistic environment.  
Proponents of Hirschman’s model insist that the important motivating factor for people is that they are constrained by a leader’s call for altruism (reinforcing the initial hypothesis).
Few example

Free rider as companies

It must be possible to transpose this reflection to the business world, because the business world is driven solely by economic interest (my profit, independently of the rest). In the micro-econmic world, altruism does not exist.
 This management system aims at maximizing profits. Profits are set as an absolute objective, regardless of externalities. This thus leads to abuses such as tax evasion.
 A reflection on the company as a free rider, would allow for the evolution of management methods, the objectives of the managers and the way in which stakeholders put pressure on the company. 
 An example of free-riding is tax evasion.
 In fact, the taxes paid allow access to a market, a market that is organized and structured indirectly by the taxes paid there.
 Fiscal optimization thus allows, by means independent of the market, to reduce the taxes paid in certain countries, while continuing to benefit from the market. These practices are associated with the free-rider issue:

  • A generalization of these practices can lead to a collapse of the system,
  • It is difficult to exclude free-rider companies under commercial agreements,
  • Companies practicing tax optimization, seek above all a personal interest, to the detriment of a public interest,


Not every benefit is necessarily free ride and the limit between free ride and deserved benefits must be analyzed with regard to the externalities at stake in the company’s activity. Management reports should highlight these practices, in order to make shareholders responsible for the strategic choices and orientations of companies.

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