The Free Rider Typically Makes Voluntary Collusion Impractical; the Free Rider Plays a Key Role in Maintaining Effective Competition

Consider the government-enforced tobacco production cartel in the United States. Product prices are supported above the competitive level through a quota program which assigns production allotments to individual producers. The price support program operates under sanctions of the federal government because of the "free rider problem." Government sanctions are said to be necessary because the free rider would otherwise prevent the formation of an effective voluntary cartel.

This result can be generalized. Producers of any product have an incentive to act in concert to restrict production and increase price. In the absence of government sanctions, however, the free rider typically makes voluntary collusion impractical. Each producer has an economic incentive to "chisel," i.e., to agree along with other producers to restrict production and, if they do so, to increase his own production. Thus, the free rider rather than posing a "problem" plays a key role in maintaining effective competition. The incentive of the individual producer to "free ride" in this case supports the "invisible hand" which harmonizes the selfish acts of the individual and the spontaneous forces of the market.

--E. C. Pasour Jr., "The Free Rider as a Basis for Government Intervention," Journal of Libertarian Studies 5, no. 4 (Fall 1981): 459-460.