---
title: the free rider is standing on a keystone parcel
canonical_url: https://ensurance.app/guide/the-free-rider-is-standing-on-a-keystone-parcel
markdown_url: https://ensurance.app/guide/the-free-rider-is-standing-on-a-keystone-parcel.md
subtitle: who already benefits and pays nothing yet
category: nature-finance
---

# the free rider is standing on a keystone parcel

*who already benefits and pays nothing yet*

The **free rider problem** is what economists call it when someone benefits from a good without paying for it, because nobody can stop them. A lighthouse shines on every ship. A flood wall protects every house behind it, whether or not its owner chipped in. The usual answers are a tax, so everyone pays, or a rule, so nobody can opt out.

Nature has the same problem with a twist: the good is produced by a particular piece of ground, and the free riders are standing on it, the way a floor stands on a beam. A [**keystone parcel**](/guide/what-is-a-keystone-parcel?from=guide) is a piece of land whose condition holds up more than its own acres. The wetland that holds the flood, the wet valley floor that stops a fire run, the forest that keeps an intake clean: each exists whether or not anyone pays for it. [**Ensurance**](/?from=guide) is how the parcels that stand on it can pay it. It is not the wetland.

:::johnson
**the free rider is already standing on it.** — The people who would pay after the wetland fails receive its flood storage for nothing while it stands.

[see who stands on one parcel →](/guide/what-is-a-serviceshed?from=guide)
:::

## the same chain, two signs

Every service a keystone parcel delivers runs along a chain: a place, what flows from it, and who is downstream. Read the chain where it is broken, and you get a bill. Read it where it is whole, and you get a benefit that nobody has invoiced.

| | where the chain is broken | where the chain is whole |
|---|---|---|
| The place | Degraded, failing, or gone | Intact and load-bearing |
| What flows downstream | A bill: treatment, claims, curtailment, smoke days | A service: clean water, flood storage, a fire buffer, cool air, pollination |
| Who is on the list | Who already pays after the loss | Who already benefits and pays nothing yet |
| What gets paid for | The fix, before the next bill | The condition, for the service already arriving |

The two lists are the same people. A town that would pay for sandbags, claims, and a boil-water notice after the wetland is drained is the same town that receives the flood storage for nothing while the wetland stands. Otter Creek's wetlands above Middlebury, Vermont, cut flood damage to the town by 54 to 78 percent in the events studied. Coastal wetlands in Hurricane Sandy's path kept an estimated $625 million of damage from happening. In neither case did the wetland send a bill.

That is the free rider problem with a place attached.

## insurance credits loss control, to the structure

Insurers already price it, in one direction.

A building with a sprinkler system, a raised floor, or a fortified roof carries less expected loss, so its owner gets a credit on the premium. That is loss control, and the price cut is the mitigation credit; the industry has priced it for generations. A sprinkler reduces the fire claim. A sprinkler earns the credit. An accredited levee lowers the rate for the houses behind it, and the district that maintains it sees none of that: the same place the wetland's work lands.

Now look at the wetland. It reduces the flood claim for every house behind it. The wet valley floor, the one [beavers, wildfire, and firebreaks](/guide/beavers-wildfire-firebreaks?from=guide) describes, reduces the fire claim for every structure the run would have reached. The headwater forest reduces the utility's treatment cost and the boil-water risk for everyone on the system. The landscape is doing the same job as the sprinkler, for more people at once.

No credit reaches it. The credit, where it exists, goes to the structure and its owner, or to the policyholders behind it. The keystone parcel is the landscape's loss control, and nobody is paying the credit to the land. [The premium went next door](/guide/the-premium-went-next-door?from=guide) traces where that value goes instead. This is not a claim about how any insurer prices a policy. It is a description of where the credit lands: on the structure's owner, or on the policyholders behind it, never on whoever keeps the land in condition.

A carrier that funds a wetland alone may watch a competitor write the house behind it next year. That is the free rider problem inside the industry, and it is why the list has to hold every carrier in the shed.

## the commons answer, and why it still holds

The usual answers at the top were a tax or a rule. An economist who has read Elinor Ostrom will point out a third, and the point is right. Communities have solved free rider problems without a market and without a tax: an irrigation system, a village forest, a fishery. Among the design principles she found: clear boundaries, rules made by the people who use the resource, monitoring, graduated sanctions, and a way to settle disputes. She studied shared resources with a known set of users. A wetland's flood storage reaches people who never meet each other, which is why the boundary comes first: the serviceshed is that boundary. [Who governs a natural asset](/guide/who-governs-a-natural-asset?from=guide) shows that kind of table at work above Denver's water: the people who tend the forest and drink from it set the rules, and a share carries them.

Nothing in this series replaces those rules. A watershed council is still the right body to decide what a headwater forest needs. What the rules usually lack is a line to fund the work they agree on, year after year, from the people the work serves. The free rider problem does not go away when the rules are good. It becomes a question of where the money for the ranger, the fence, and the culvert comes from once the grant ends.

## from free rider to co-payor

The way out is not to shame anyone. It is to make two things visible and one thing cheap.

**Visible: the list.** [What is a serviceshed](/guide/what-is-a-serviceshed?from=guide) draws the area a parcel serves and names who is inside it. Overlapping sheds give the full list: the utility, the hospital, the rail line, the farms, the county, the insurer of all of them. Everyone on it already receives the service.

**Visible: the bill.** For each name on the list, the cost of the service failing is a number that already exists in their own accounts: a treatment surcharge, a claim, a closed road, a curtailment. [Your place depends on a place](/guide/your-place-depends-on-a-place?from=guide) shows how a built asset finds that number.

**Cheap: paying first.** The party with the largest bill after the loss is the likeliest to pay first, because for them the arithmetic is simplest. For a water utility, keeping the forest intact costs less than the plant it would otherwise build; New York's ratepayers have been making that choice since 1997, as [what is the beneficiary pays principle](/guide/what-is-the-beneficiary-pays-principle?from=guide) sets out. Once one party pays and the line exists, the others on the list can join it for a share proportional to their dependence, which is smaller than carrying it alone and smaller than the bill.

The limit is honest. Nobody can be excluded from the flood storage or the clean air, so nobody can be forced to pay. Cheaper than the bill is true for the shed as a whole, not for each party in it: any one of them still does better if the others pay. That gap never closes. What narrows it is what the commons always used: a list everyone can see, payments everyone can check, and pledges that start only when the others on the list pledge too. The payment then has somewhere to land. [How a keystone parcel gets paid](/guide/how-a-keystone-parcel-gets-paid?from=guide) is the last of those three.

## what it looks like from each seat

| if you are | what you already receive | the move |
|---|---|---|
| An insurer | Lower losses from wetlands, buffers, and intact forest, already inside your hazard maps as water that never reached the house, with nothing on the book for what happens if the parcel goes | Map the keystone parcels under your concentrations of exposure; treat their condition as loss control you can help fund rather than a peril you only model |
| A county or a city | Flood storage, clean air, and source water you do not budget for until they fail | Put the parcels in the asset-management plan beside the pipes and the plant, as the asset the pipes depend on, and give their upkeep an operating line |
| A corporation with a plant, a campus, or a supply chain | Water, cooling, and a workable climate at a site you chose for other reasons | Trace inward from the site, name the parcel, and join the others who stand on it |

None of these is a donation. Each is the cheaper side of a bill the party already carries.

## frequently asked questions

### what is the free rider problem?

The free rider problem arises when people benefit from a good they did not pay for because they cannot be excluded from it. Public goods like clean air, flood protection, and a lighthouse have it. Taxes, rules, and voluntary agreements are the usual remedies.

### how does the free rider problem apply to nature?

A keystone parcel, such as a wetland or a headwater forest, delivers flood storage, clean water, or a fire buffer to everyone within its reach. None of them can be excluded, so few of them pay, and the parcel's owner carries it alone.

### do insurers pay for natural loss control?

Insurers give premium credits for loss control on a structure: sprinklers, levees, fortified roofs. There is no equivalent credit paid to the land that reduces the same losses for many structures at once. That gap is the subject of this post.

### is the answer a tax?

Sometimes a tax, sometimes a rate. Costa Rica's forest payments draw on a fuel tax. New York's water ratepayers fund the Catskills through a water rate set by a public board, not a tax. The alternative described in this series is a voluntary, repeating payment from the parties on the serviceshed list, proportional to their dependence, with the rules of the commons still deciding what the parcel needs.

## next

The last post in this series gives the payment an address: [how a keystone parcel gets paid](/guide/how-a-keystone-parcel-gets-paid?from=guide).

If you underwrite concentrations of exposure that sit behind a wetland or below a forest, [insurers](/solutions/insurers?from=guide&topic=keystone-parcels) sets out how ensurance approaches loss reduction with carriers. If you already know the parcel your claims depend on, [name it](/contact?from=guide&topic=keystone-parcels).

## sources

Watson, K.B. et al. 2016. Quantifying flood mitigation services: the economic value of Otter Creek wetlands and floodplains to Middlebury, VT. *Ecological Economics* 130, 16–24. — Flood damage reduced 54–78%.

[Narayan, S. et al. 2017. The value of coastal wetlands for flood damage reduction in the northeastern USA. *Scientific Reports*.](https://doi.org/10.1038/s41598-017-09269-z) — An estimated $625 million in Sandy damages avoided.

[Ostrom, E. 1990. *Governing the Commons: The Evolution of Institutions for Collective Action*. Cambridge University Press.](https://doi.org/10.1017/CBO9780511807763) — The design principles for self-governed commons.

[NYC Watershed Memorandum of Agreement, 1997](https://nycwatershed.org/wp-content/uploads/2026/03/nyc_watershed_moa_1997.pdf) — The agreement signed 21 January 1997.

[FONAFIFO, frequently asked questions](https://www.fonafifo.go.cr/en/informacion-general/preguntas-frecuentes/) — Costa Rica's program draws on a share of the single fuel tax.

## the series

1. [what is a keystone parcel](/guide/what-is-a-keystone-parcel?from=guide)
2. [does protecting one parcel help the land around it](/guide/does-protecting-one-parcel-help-the-land-around-it?from=guide)
3. [what is a serviceshed](/guide/what-is-a-serviceshed?from=guide)
4. [how to find the keystone parcels in a watershed](/guide/how-to-find-the-keystone-parcels-in-a-watershed?from=guide)
5. [the free rider is standing on a keystone parcel](/guide/the-free-rider-is-standing-on-a-keystone-parcel?from=guide)
6. [how a keystone parcel gets paid](/guide/how-a-keystone-parcel-gets-paid?from=guide)