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Path: utzoo!utcsri!ubc-vision!alberta!calgary!radford
From: radford@calgary.UUCP (Radford Neal)
Newsgroups: net.politics.theory
Subject: Solution to Free Rider problem
Message-ID: <20@calgary.UUCP>
Date: Mon, 30-Dec-85 18:22:15 EST
Article-I.D.: calgary.20
Posted: Mon Dec 30 18:22:15 1985
Date-Received: Mon, 30-Dec-85 23:22:38 EST
Distribution: net
Organization: University of Calgary, Calgary, Alberta
Lines: 81

Frequently one sees postings in this group claiming that so-called
"Free Rider" problems require government intervention for their solution.
A typical situation:

     Residents of a river valley would all benefit from a dam upstream
     for flood control. But without the government taxing them to 
     pay for it, they will all wait for someone else to pay and hence
     the dam will never be built, to everyone's disadvantage.

We may distinguish two "bad" results from such situations:

    1) The dam is never built, even though the cost is less than the
       benefit.

    2) The dam is built, but its financing is "unfair". (E.g. half the
       people pay for it even though all benefit).

I propose a solution here which eliminates the first bad result and 
most of the second.

The dam gets built as follows:

    A promoter for the scheme defines the project and determines how 
    much it will cost. He establishes a trust fund to be used to
    fund the scheme. Anyone may donate money to the trust fund. No
    money is disbursed until the fund contains enough money to 
    complete the project. If enough money is not collected by some
    specified time, all money is given back to the contributors.

Some details:

    1) Provision could be made to compensate the promoter for his
       efforts out of the trust fund.

    2) Management of the project could be controlled by the contributors
       to the fund in whatever fashion the promoter defined initially.

    3) The "cost" of the dam could be estimated on the high side to 
       allow for contingincies and any excess refunded to the contributors.

    4) People wishing to contribute who don't have cash could borrow
       via usual channels.

    5) Refunds in the event of the project not going ahead would include
       interest. (The trust fund would be invested in some conservative
       fashion.)

Would people contribute? They would if they percieve the benefits as
actually exceeding the cost. If a resident thinks the dam is worth 1000 
dollars to him, he will rationally contribute up to that amount unless
he has a liquidity problem which financial institutions won't help him
with for some reason. (In that case, a 1000 dollar tax increase would
be disastrous for him.) If the dam never gets built he loses nothing;
if it does, he benefits.

Would people hold back in the hopes that the dam will be built using
other people's contributions, giving them the benefits for no cost?
Maybe, but they delay their benefits if they do. The longer the dam
goes unbuilt, the less likely it seems that they can get away with this
and the more likely they are to contribute what they think is "fair".

A possible disadvantage is that contributors might resent non-contributors
whom they thought benefitted. This sort of envy is not very rational, and
not very moral, but could cause ill-feeling anyway.

Some advantages absent from governmental schemes:

    1) People who truely don't benefit don't pay. (e.g. those who
       don't mind floods, don't think the dam will work, think it
       costs too much relative to the benefit for them).

    2) No coercion is required.

So: Any comments? Have I convinced those who didn't think this problem
could be solved in a libertarian context?

Note that I'm not attempting here to solve all problems with
building dams. In particular, I'm not addressing the "eminent domain"
problem concerning getting the land for it.

    Radford Neal