Behavioral economics: spiteful behavior explained

Spiteful behavior aims at harming others even though the actor pays costs. It is a lose-lose situation and no one seems to be better off, but this type of behavior is not so rare and often debated in public economics when public utilities have free rider problems. Why do some people act like that? The answer is easy; the actor is winning actually. Economically, there are two equilibrium states and both are possible outcomes.

Let's think about a hundred people living in an island who made a bridge to access mainland. The bridge was constructed themselves and costs were distributed evenly among islanders. The construction cost is a sunk cost, so we'll ignore it to make it simple. The maintenance cost of the bridge is $100 per day and only people in the island use the bridge and they get benefit of $1 per person per day by using the bridge.

First, let's consider utopian society. To pay maintenance cost, bridge toll of $1 is collected. Everyone pays and there is no complaint. Benefits and costs are both $100 and it is in an equilibrium state. Calculations are given below.

Utopian society
Benefits: $1 * 100 people = $100
Costs: $1* 100 people = $100

However, this is unrealistic since some people won't pay toll and become free riders. Let's say only 80% of people pays toll. In this case, maintenance cost cannot be paid so the bridge is not sustainable.

Real society
Benefits: $1 * 100 people = $100
Costs: $1 * 80 people = $80

To collect toll fairly, people could hire security guards or install a gate to ensure toll payment. In either case, higher toll is unavoidable. Assuming the number of people who pay toll unchanged, toll needs to be set at $1.25 to pay maintenance cost. The new toll rate brings new equilibrium.

Real society modified
Benefits: $1 * 100 people = $100
Costs: $1.25 * 80 people = $100

It's in equilibrium so usual economics ends here, yet spiteful behavior occurs when people demand fairness and equality. The logic is understandable: "Some people are free riding while we pay expensive toll, so let's punish free riders." Finding every free rider and having them pay toll is, however, costly and unrealistic. Breaking the bridge is a feasible answer. Rationally, isn't it better to be able to use the bridge even if some people cross the bridge for free? Why are people willing to lose access to the bridge to punish free riders? Actually, breaking the bridge leads to a new equilibrium state and good people are gaining. The result is below.

Bridge torn down (spiteful behavior)
Benefits: $1 * 0 people = $0
Costs: $1.25 * 0 people = $0

This looks the same as before the bridge was constructed, but it isn't. If we focus on those who were paying toll, they had been losing $0.25 per day (benefit of $1 minus cost of $1.25) indefinitely and that burden is now gone. Conversely, free riders were enjoying benefit of $1 per day but now they lost it. We can see that there was transfer of value; good people were giving up $0.25 * 80 = $20 to free riders. Losing access to mainland may be irrational, but good people are acting rationally and pursuing their own benefits.

Excluding utopian society, there are two equilibrium states in real society. The first state is very common in our society, but it may not last because people don't like free riders. "Other people are not paying." "It's too expensive." These voices could gain popularity and less and less people might pay toll. Abandoned bridge is a dangerous place. People stop crossing and it might become a slum. Tearing down the bridge is a better option than leaving the danger of accidents and a possible slum.

As you can see, spiteful behavior is done for justice and personal gains so it's not that insane as it might look. Examining merits and demerits and balancing them by considering equilibrium states could be useful for problem solving.