It is summer time now and there are street musicians on the sidewalks playing bad Sinatra. One of them, in Cambridge the other night, had a sign that said "Pay me so I can bring my music somewhere else."
These musicians probably have only one thing in common with the state: They are in the business of providing public goods. Let's here assume that people actually enjoy the public goods that the state and the street musicians provide. This is the official economic term by the way - the word "good" is not in the sense of "the good, the bad and the ugly"; it just reflects the idea that there is a product whose consumption is both non-excludable and non-rival.
Let me explain these qualities a little bit more. First, if music is playing, we can't really prevent any of the passersby from hearing it. This is the non-excludability clause. For instance, we are able to exclude people from watching a movie by requiring them to purchase tickets. Or, consuming milk is only possible once payment is made. Not the case with a public good.
Second, one person's consumption of the music does not decrease others' consumption. This is the non-rivalry clause. A counter example would be fishing in a common pond. Since there can only be a limited number of fish in the pond, the moment I catch one, I'd be reducing your probability of consumption. Public goods are not like that. Whether or not I listen to the music, you can hear it just fine when you walk by moments later.
The idea is appealing: Goods for everyone's consumption. Why can't we have more of these products in the economy, for everyone to enjoy? If people voluntarily contributed their share of use towards the good, we would be ok. But then there are those who would want a free ride. In economics, the public goods provision is a part of collective bargaining problems because of such people.
The term free-riding initially came from those who used public transportation but didn't pay the fare. Most systems can handle a few free riders, but if everyone tried it, there would be no funds to operate public transportation and the good would be underprovided. Under no-monitoring, we know that about 50% would contribute, and the rest would free ride. Over time, once we repeat the games, the free-riders would win.
Results of public goods contribution games in the laboratory seem robust (start at 50%, decline to 0% over time). I run this test every semester in my classrooms to explain the conflict between self-interest and the social good. Looking at the problem from a distance, students have a hard time understanding why people fail to contribute. But once they are in the shoes of the decision-maker, they under provide the public good themselves.
How we play this game is as follows: Let say there are 20 students in the classroom. I give each student 4 cards, 2 black and 2 red. The black cards are worthless. What counts will be the number of red cards.
Every student will make a "contribution" decision. Red cards determine the level of contributions. I go around and collect two cards, face down, from each student. They have 3 options: They could give me 2 red cards (contribute totally to the public good), 2 black cards (contribute nothing to the public good) or 1 red, 1 black card (contribute half of the endowment to the public good).
Each red card they keep in their hands is worth 10 points. This is like a dollar left in our pocket instead of in the musician's hat. Each red card contributed to the common pool is worth 5 points. Once the contributions are collected, the total sum is given back to everyone to enjoy.
On the one hand, if everyone contributed both red cards, the common pool would have 40 red cards (20 people, each having given 2 red cards). That is 200 points for everyone's consumption, and that's the social maximum.
Remember, though, that there is no exclusion from the consumption of the good. So an individual will be able to consume it even when she hasn't contributed to it. Unfortunately this leads to the free-riding phenomenon: individuals want others to contribute, and they want to keep the red cards to themselves.
From an individual's point of view, the other 19 people giving both red cards up will be worth 190 points. With 2 red cards at hand, the individual collects 210 points. But people catch up on free riding, and everyone starts keeping the red cards in their hands instead of contributing, and everyone ends up with 20 points.
How to get people contribute is a major question experimentalists try to answer. In the classroom, there are always a few good men who keep giving both red cards over and over in order to "teach" others a lesson, but in reality contributions decline over time. What happens in experiments repeatedly is that people usually test the waters by contributing only 1 red card to the common pool, so that in the initial rounds of the experiment I collect as many red cards as black cards. Then over time, the free riders win: People systematically switch from giving reds to giving blacks.
We try several methods: We make contributions public events, we impose sanctions on free riders, we open the floor to communication, but it is very hard to get people contribute when there is no monitoring or punishment.
My students or experimental subjects are not selfish people. They are not different than anyone else. This game is played across the world, and we usually see self-interest win over time. A few exceptions are communities who survive on collective activity. For everyone else, free riding wins in the long run.
Unfortunate, but true. In the current economic system, the state provides the public good and taxes the people and makes it illegal to free ride. It imposes sanctions on those who don't contribute. But I'm sure people cheating on their taxes is not news to anyone, and the whole system of monitoring and punishing itself is costly.
The real challenge is to find ways to make people want to contribute even when no one is watching or punishing. There is hope, in the sense the people contribute a little bit in the initial stages of the games. Then, once they see the cheaters, they cheat themselves. So maybe we have to look at psychology instead of only focusing on economic incentives.
It might be that people tend to weigh bad examples more heavily. For example, when students see someone cheating in an exam, they report that they are more likely to cheat themselves. There might be lots of other students working honestly on their exams, but the one who cheats and gets away stays in our mind. Criminal activity is contagious, and so is free riding.
I'm not a policy maker and I don't know how to get my students to increase or even maintain contributions in the classroom. But I know this: Next time I'm walking in Harvard Square browsing books by the sidewalk, I expect the musician still to be there, not having collected enough funds that will take him to warmer climates.