Thursday, July 19, 2012

Would you lend money to your best friend?

Good morning everyone. Today we will touch on the idea of public goods. A public good is a good or service that can be used by everyone in society. It is impossible to exclude anyone from using it and all the people who wish to use it can do so at the same time (simultaneous consumption). A fine example of a public good is street lighting. Everyone can use it and it would be impossible to limit its consumption.

The problem with public goods is that a lot of people do not contribute to the funds necessary for their provision. This is known as the free rider problem. People figure that since the good is non exclusive, in other words nobody can prohibit them from using it, they can get away with not paying for its provision.
So society is split between cooperators, the people that do pay, and free riders.

In the morning I was listening to the radio while driving to work and the topic of discussion was the refusal of workers' collective funds to lend money to the Cypriot government for three months. This is a relatively short term loan which will most likely be repaid in full with the money received as aid from the European Union. Whats more,  workers, and more particularly government employees, have been enjoying government benefits for a number of years.

  So here we have a situation where the government has been providing public goods to all people (sometimes at a cost) and when the time came, people refused to return the favor in the form of financial assistance. We are becoming, it seems, free riders. Darn recession!

Have a free riding day!

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