While I have never lived in a place with free transit, I have lived in places where it was possible to board trains without passing through fare gates and certain busses through the rear exit. It is amazing how much faster boarding is. They probably face some lost fares, but the benefit of faster travel times outweigh the cost.
I also think that those criticizing free fares are disingenuous. None of those cities had problems with (insert stereotypical undesirable group) using public transit. If anything, there were fewer issues because everyone was more inclined to behave since there were more eyes on the trains and busses.
EDIT: it's also worth noting that collecting money costs money. That's especially noticeable when upgrading to (or to new) electronic fare systems, but it's also true when using things like tickets and cash. It probably doesn't mean such in the cities I've lived in ($3+ fares), but I'll bet it accounts for a lot more in cities that charge $0.50 or $1 fares.