Today's Top Gainer
Note:Top Gainer - Nifty 50 More
Free rider problem:
Consumers can take advantage of public goods without contributing sufficiently to their creation. This is called the free rider problem, or occasionally, the "easy rider problem" (because consumer's contributions will be small but non-zero).
That which is the only one of its kind -Unique. Sui generis is a Latin term meaning “a special kind”. In intellectual property rights discourse (IPRs) the term refers to a special form of protection regime outside the known framework. The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) requires member states to provide protection for plant varieties either by patents or by an effective sui generis (stand alone) system, or a combination of the two.
Free Rider problem:
As discussed earlier, Consumers can take advantage of public goods without contributing sufficiently to their creation. This is called the free rider problem, or occasionally, the "easy rider problem" (because consumer's contributions will be small but non-zero).
In economics, a public good is a good that is non-rivaled and non-excludable. This means, respectively, that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good. In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.
For example, if one individual eats all the available food, there is no food left for anyone else, and it is possible to exclude others from consuming the food; it is a rivaled and excludable private good. Conversely, breathing air neither significantly reduces the amount of air available to others, nor can people be effectively excluded from using the air. This makes it a public good, but one that is economically trivial, as air is a free good. A less trivial example is the exchange of freely downloadable music files on the internet, the use of these files by anyone one person does not restrict the use by anyone one else, and there is little effective control over the exchange of these music files (unless protected by password and charged by the provider)
A classic day today example of free rider and public good is defense and law enforcement (including the system of property rights), public works, lighthouses, clean air, inventions and so on.
Consider national defense, a standard example of a pure public good. A purely rational person is an individual who is extremely individualistic, considering only those benefits and costs that directly affect him or her. Public goods give such a person incentive to be a free rider. Suppose this purely rational person thinks about exerting some extra effort to defend the nation. The benefits to the individual of this effort would be very low, since the benefits would be distributed among all of the millions of other people in the country. There is also a very high possibility that he or she could get injured or killed during the course of his or her military service. On the other hand, the free rider knows that he or she cannot be excluded from the benefits of national defense, regardless of whether he or she contributes to it. There is also no way that these benefits can be split up and distributed as individual parcels to people. The free rider would not voluntarily exert any extra effort, unless there is some inherent pleasure or material reward for doing so (for example, money paid by the government, as being a part of volunteer army).In the case of invention, an inventor of a new product may benefit all of society, but hardly anyone is willing to pay for the invention if they can benefit from it for free.
It occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk.
Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.
Economists explain moral hazard as a special case of information asymmetry, a situation in which one party in a transaction has more information than another. In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.
Moral hazard also arises in a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.
Information asymmetry models assume that at least one party to a transaction has relevant information whereas the other(s) do not. Some asymmetric information models can also be used in situations where at least one party can enforce, or effectively retaliate for breaches of, certain parts of an agreement whereas the other(s) cannot.
In adverse selection models, the ignorant party lacks information while negotiating an agreed understanding of or contract to the transaction, whereas in moral hazard the ignorant party lacks information about performance of the agreed-upon transaction or lacks the ability to retaliate for a breach of the agreement. An example of adverse selection is when people who are high risk are more likely to buy insurance, because the insurance company cannot effectively discriminate against them, usually due to lack of information about the particular individual's risk but also sometimes by force of law or other constraints. An example of moral hazard is when people are more likely to behave recklessly after becoming insured, either because the insurer cannot observe this behavior or cannot effectively retaliate against it, for example by failing to renew the insurance.
- Prof. M. Guruprasad,
AICAR BUSINESS SCHOOL