| >"In my real estate venture, the dividends are paid exclusively to the investors who are my shareholders. So there are no free riders; the people who don't invest don't get the same benefits as those who do." The investors don't care if there are free riders as long as they get the expected benefits. The neighboring property values may rise, for example. >"That's wonderful but how do we limit the benefits to the shareholders of the waste treatment plant, so as to convince people to invest in it?" I just can't get past this. This is just not something I consider in any way when choosing to make an investment/donation. I simply do not care if other people may benefit, that is not my concern. I mean lets take a smaller task: Say I feel like doing the dishes so I can have a clean plate later in the day. Once I get going with doing dishes, its not a hassle to finish them. Should I be upset if someone else uses one of the dishes I cleaned? Should I not do the dishes, even if I want to, because eventually someone else may do them? If it was likely for someone else to take care of it, why hasn't it already been done? |
The investors aren't particularly concerned about small positive externalities such as the increase in surrounding property values. (If the positive externalities are very large, they would probably attempt to capture them somehow -- such as buying up the whole neighbourhood before proceeding with the development. This is why profitable train companies in Asia build train lines to where they own the land, and develop the area around their stations into shopping malls and residential complexes).
That's very different than having free riders. If you give your investors the option of paying $100 per share, or $0 per share, and in either case they'll get the same number of shares, then you suddenly won't find any investors willing to pay. Even if it's a profitable endeavour at $100 per share!
Why would you be offering such a strange deal to your investors? Well, you wouldn't, because it would totally undermine your ability to get your project funded. But it's exactly the model you're proposing when you suggest that private citizens might donate to the government if they really want public infrastructure to get funded! The ones who don't donate are paying $0/share, and the ones who do are paying $100/share, and they all get equal use of the infrastructure.
The free rider problem is not when you try to get investors to buy into your project, even though a few people who don't buy in will also benefit slightly. It's when you try to get investors to buy into your project, even though anybody who doesn't buy in benefits just as much.
Having said this, now let me put it in the context of your quote:
> "This is just not something I consider in any way when choosing to make an investment"
When you consider purchasing shares of a company for $100/share, do you not consider in any way the possibility that these shares might be available for a lower price from another seller? I would expect you would do research and pay the lowest price that is on offer. And if someone is offering them for $0/share, wouldn't you consider that when deciding whether or not to pay $100?
edit: Let me bring this back to the example. How are you going to pitch investors to pay to upgrade a water treatment plant, when they'll reap exactly the same gains from it as their neighbours who didn't contribute a dime? Or, after attempting this and failing to raise any funds whatsoever, let alone the required $500 million, how might you alter your fundraising strategy to make it more successful?
To simplify, let's assume that every one of the 5 million citizens has equal wealth, and the identical preferences, and is willing contribute up to at most $200 for this project, but prefers to pay the minimum possible amount and will always opt to pay $0 if the treatment plant gets built regardless.