Excludability

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In economics, a good or service is called excludable if it is possible to prevent people (consumers) who have not paid for it from having access to it. By comparison, a good or service is non-excludable if non-paying consumers cannot be prevented from accessing it.[ citation needed ]

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Contents

Definition matrix

Excludable Non-excludable
Rivalrous Private goods
food, clothing, cars, parking spaces
Common-pool resources
fish stocks, timber, coal
Non-rivalrous Club goods
cinemas, private parks, satellite television
Public goods
free-to-air television, air, national defense

Examples

An architecturally pleasing building, such as Tower Bridge, creates an aesthetic non-excludable good, which can be enjoyed by anyone who happens to look at it. It is difficult to prevent people from gaining this benefit. A lighthouse acts as a navigation aid to ships at sea in a manner that is non-excludable since any ship out at sea can benefit from it.

Tower Bridge bridge in London, United Kingdom

Tower Bridge is a combined bascule and suspension bridge in London, built between 1886 and 1894. The bridge crosses the River Thames close to the Tower of London and has become an iconic symbol of London. As a result, it is sometimes confused with London Bridge, about half a mile upstream. Tower Bridge is one of five London bridges owned and maintained by the Bridge House Estates, a charitable trust overseen by the City of London Corporation. It is the only one of the trust's bridges not to connect the City of London directly to the Southwark bank, as its northern landfall is in Tower Hamlets.

Lighthouse Structure designed to emit light to aid navigation

A lighthouse is a tower, building, or other type of structure designed to emit light from a system of lamps and lenses and to serve as a navigational aid for maritime pilots at sea or on inland waterways.

The ease and availability of file sharing technology has made many forms of information, especially music, movies, e-books, and computer software non-excludable. If the content producers want to make their works excludable, they have to use either "copy protection" schemes, or use law enforcement in order to prevent one owner of a copy from being able to share it with others.

Copy protection, also known as content protection, copy prevention and copy restriction, is any effort designed to prevent the reproduction of software, films, music, and other media, usually for copyright reasons. Various methods have been devised to prevent reproduction so that companies will gain benefit from each person who obtains an authorized copy of their product. Unauthorized copying and distribution accounted for $2.4 billion in lost revenue in the United States alone in the 1990s, and is assumed to be causing impact on revenues in the music and the game industry, leading to proposal of stricter copyright laws such as PIPA. Some methods of copy protection have also led to criticisms because it caused inconvenience for honest consumers, or it secretly installed additional or unwanted software to detect copying activities on the consumer's computer. Making copy protection effective while protecting consumer rights is still an ongoing problem with media publication.

An example of an excludable good could be a magazine; people who do not pay for the subscription are mostly excluded from obtaining a copy directly from the publisher. Another case is a pay television subscription, which is excludable but non-rivalrous.

Pay television, also known as subscription television or premium television, are subscription-based television services, usually provided by multichannel television providers, but also increasingly via digital terrestrial, and streaming television. Subscription television began in the multi-channel transition and transitioned into the post-network era. Some parts of the world, notably in France, Latin America and the United States, have also offered encrypted analog terrestrial signals available for subscription.

Implications and inefficiency

Public goods will generally be underproduced and undersupplied in the absence of government subsidies, relative to a socially optimal level. This is because potential producers will not be able to realize a profit (since the good can be obtained for free) sufficient to justify the costs of production. In this way the provision of non-excludable goods is a classic example of a positive externality which leads to inefficiency. In extreme cases this can result in the good not being produced at all, or it being necessary for the government to organize its production and distribution.

A classic example of the inefficiency caused by non-excludability is the tragedy of the commons (which Hardin, the author, later corrected to the 'tragedy of the unmanaged commons' because it is based on the notion of an entirely rule-less resource) where a shared, non-excludable, resource becomes subject to over-use and over-consumption, which destroys the resource in the process.

Tragedy of the commons A theoretical concept concerning the allocation of shared, open access resources

The tragedy of the commons is a situation in a shared-resource system where individual users, acting independently according to their own self-interest, behave contrary to the common good of all users by depleting or spoiling the shared resource through their collective action. The theory originated in an essay written in 1833 by the British economist William Forster Lloyd, who used a hypothetical example of the effects of unregulated grazing on common land in Great Britain and Ireland. The concept became widely known as the "tragedy of the commons" over a century later due to an article written by the American biologist and philosopher, Garrett Hardin in 1968. In this modern economic context, "commons" is taken to mean any shared and unregulated resource such as atmosphere, oceans, rivers, fish stocks, roads and highways, or even an office refrigerator.

Economic theory

Brito and Oakland (1980) study the private, profit-maximizing provision of excludable public goods in a formal economic model. [1] They take into account that the agents have private information about their valuations of the public good. Yet, Brito and Oakland only consider posted-price mechanisms, i.e. there are ad-hoc constraints on the class of contracts. Also taking distribution costs and congestion effects into account, Schmitz (1997) studies a related problem, but he allows for general mechanisms. [2] Moreover, he also characterizes the second-best allocation rule, which is welfare-maximizing under the constraint of nonnegative profits. Using the incomplete contracts theory, Francesconi and Muthoo (2011) explore whether public or private ownership is more desirable when non-contractible investments have to be made in order to provide a (partly) excludable public good. [3]

See also

Related Research Articles

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Microeconomics is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

Monopoly Market structure with a single firm dominating the market

A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

Monopolistic competition Imperfect competition of differentiated products that are not perfect substitutes

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition.

Privatization transferring something from the public sphere to the private

Privatization can mean different things including moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when a heavily regulated private company or industry becomes less regulated. Government functions and services may also be privatized; in this case, private entities are tasked with the implementation of government programs or performance of government services that had previously been the purview of state-run agencies. Some examples include revenue collection, law enforcement, and prison management.

Environmental economics is a sub-field of economics concerned with environmental issues. It has become a widely studied topic due to growing environmental concerns in the twenty-first century. Environmental Economics "...undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world .... Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming."

In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods, or services of a communal nature do not pay for them. Free riders are a problem because while not paying for the good, they may continue to access it. Thus, the good may be under-produced, overused or degraded. The free-rider problem in social science is the question of how to limit free riding and its negative effects in these situations. The free-rider problem may occur when property rights are not clearly defined and imposed.

Market failure in economics, inefficient resource allocation resulting in a net loss of value

In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient– that can be improved upon from the societal point of view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.

Public good (economics) Good that is non-excludable and non-rival

In economics, a public good is a good that is both non-excludable and non-rivalrous in that individuals cannot be excluded from use or could be enjoyed without paying for it, and where use by one individual does not reduce availability to others or the goods can be effectively consumed simultaneously by more than one person. This is in contrast to a common good such as wild fish stocks in the ocean, which is non-excludable but is rivalrous to a certain degree, as if too many fish are harvested, the stocks will be depleted.

Public finance public finance in economics

Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

In economics and business ethics, a coercive monopoly is a firm that is able to raise prices, and make production decisions, without risk of competition arising to draw away their customers. A coercive monopoly is not merely a sole supplier of a particular kind of good or service, but it is a monopoly where there is no opportunity to compete with it through means such as price competition, technological or product innovation, or marketing; entry into the field is closed. As a coercive monopoly is securely shielded from possibility of competition, it is able to make pricing and production decisions with the assurance that no competition will arise. It is a case of a non-contestable market. A coercive monopoly has very few incentives to keep prices low and may deliberately price gouge consumers by curtailing production. Also, according to economist Murray Rothbard, "a coercive monopolist will tend to perform his service badly and inefficiently."

State ownership

State ownership is the ownership of an industry, asset, or enterprise by the state or a public body representing a community as opposed to an individual or private party. Public ownership specifically refers to industries selling goods and services to consumers and differs from public goods and government services financed out of a government's general budget. Public ownership can take place at the national, regional, local, or municipal levels of government; or can refer to non-governmental public ownership vested in autonomous public enterprises. Public ownership is one of the three major forms of property ownership, differentiated from private, collective/cooperative, and common ownership.

A social dilemma is a situation in which an individual profits from selfishness unless everyone chooses the selfish alternative, in which case the whole group loses. Problems arise when too many group members choose to pursue individual profit and immediate satisfaction rather than behave in the group's best long-term interests. Social dilemmas can take many forms and are studied across disciplines such as psychology, economics, and political science. Examples of phenomena that can be explained using social dilemmas include resource depletion, low voter turnout, and overpopulation.

Club good

Club goods are a type of good in economics, sometimes classified as a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs. Often these goods exhibit high excludability, but at the same time low rivalry in consumption. Because of that low rivalry in consumption characteristic, club goods have essentially zero marginal costs and are generally provided by what is commonly known as natural monopolies. Furthermore Club goods have artificial scarcity. Club theory is the area of economics that studies these goods. One of the most famous provisions was published by Buchanan in 1965 "An Economic Theory of Clubs", in which he addresses the question of how the size of the group influences the voluntary provision of a public good and more fundamentally provides a theoretical structure of communal or collective ownership-consumption arrangements.

The Ramsey problem, or Ramsey–Boiteux pricing, is a Second best policy problem concerning what price a public monopolist or a firm faced with an irremovable revenue constraint should set, in order to maximize social welfare. A closely related problem arises in relation to optimal taxation of commodities.

An assurance contract, also known as a provision point mechanism, or crowdaction, is a game theoretic mechanism and a financial technology that facilitates the voluntary creation of public goods and club goods in the face of collective action problems such as the free rider problem.

In economics, a common-pool resource (CPR) is a type of good consisting of a natural or human-made resource system, whose size or characteristics makes it costly, but not impossible, to exclude potential beneficiaries from obtaining benefits from its use. Unlike pure public goods, common pool resources face problems of congestion or overuse, because they are subtractable. A common-pool resource typically consists of a core resource, which defines the stock variable, while providing a limited quantity of extractable fringe units, which defines the flow variable. While the core resource is to be protected or nurtured in order to allow for its continuous exploitation, the fringe units can be harvested or consumed.

The Commonize Costs–Privatize Profits Game is a concept developed by the ecologist Garrett Hardin to describe a "game" widely played in matters of resource allocation. The concept is Hardin's interpretation of the closely related phenomenon known as the tragedy of the commons, and is referred to in political discourse as "privatizing profits and socializing losses."

Property rights are theoretical socially-enforced constructs in economics for determining how a resource or economic good is used and owned. Resources can be owned by individuals, associations, collectives, or governments. Property rights can be viewed as an attribute of an economic good. This attribute has four broad components and is often referred to as a bundle of rights:

  1. the right to use the good
  2. the right to earn income from the good
  3. the right to transfer the good to others, alter it, abandon it, or destroy it
  4. the right to enforce property rights

In economics, profit in the accounting sense of the excess of revenue over cost is the sum of two components: normal profit and economic profit. All understanding of profit should be broken down into three aspects: the size of profit, the portion of the total income, and the rate of profit. Normal profit is the profit that is necessary to just cover the opportunity costs of an owner-manager or of a firm's investors. In the absence of this profit, these parties would withdraw their time and funds from the firm and use them to better advantage elsewhere. In contrast, economic profit, sometimes called excess profit, is profit in excess of what is required to cover the opportunity costs.

Production for use is a phrase referring to the principle of economic organization and production taken as a defining criterion for a socialist economy. It is held in contrast to production for profit. This criterion is used to distinguish socialism from capitalism, and was one of the fundamental defining characteristics of socialism initially shared by Marxian socialists, evolutionary socialists, social anarchists and Christian socialists.

References

  1. Brito, Dagobert L.; Oakland, William H. (1980). "On the Monopolistic Provision of Excludable Public Goods". The American Economic Review. 70 (4): 691–704. JSTOR   1803565.
  2. Schmitz, Patrick W. (1997). "Monopolistic Provision of Excludable Public Goods under Private Information". Public Finance. 52 (1): 89–101.
  3. Francesconi, Marco; Muthoo, Abhinay (2011). "Control Rights in Complex Partnerships" (PDF). Journal of the European Economic Association. 9 (3): 551–589. doi:10.1111/j.1542-4774.2011.01017.x. ISSN   1542-4766.

Further reading