What is the Free Rider Problem?

What is the Free Rider Problem?

A free rider is when someone enjoys the benefit of a good/service that they didn’t pay for. The free rider problem is that the good/service is thus underprovided. For if there is no penalty to free riding, people will free ride for it maximizes their personal value function (benefit-cost). If their cost becomes zero, their value is higher. The more people mooch off the system, the less people that are actually paying for it. The good seller/service provider thereby has less money and thus has a smaller ability to provide their good/service.


A company provides private security services. Within a neighborhood, 11 out of the 12 houses hire that company to protect their homes. A gunman shows up at that 12th house and starts shooting at them, the gunman poses a threat to the 11 houses that did pay so the gunman is apprehended and sent to jail. The 12th house enjoyed the benefit without paying. The 11th house therefore decided to not pay and mooch off the system. There will be protected regardless if they pay or not. The company thereby has less money and thus less ability to do their job.

Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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