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Free-rider Paradox

Sometimes benefits and costs cannot be allocated accurately or at all to users by the markets or otherwise. A free rider tries to take advantage of this situation. The paradox is that if everyone tries to free ride no one can and everyone is worse off. An important example is the natural environment. Most industrial users of the natural environment are free riders. Everyone collectively is worse off but no one individually finds it worthwhile to stop. In takeovers, an important recent example is the basic research part of corporate research and development. It is impossible to limit the benefits from basic research to the corporation who pays the bill. Therefore, there will be a strong temptation for companies to free ride. Competition in the product and takeover market should increase this temptation.

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