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In
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, a good, service or resource are broadly assigned two fundamental characteristics; a degree of excludability and a degree of
rivalry
A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry is the "against each other" spirit between two competing sides. The relationship itself may also be called "a rivalry", and each participant ...
. Excludability is defined as the degree to which a good, service or resource can be limited to only paying customers, or conversely, the degree to which a supplier, producer or other managing body (e.g. a government) can prevent "free" consumption of a good.
Excludability was originally proposed in 1954 by American economist
Paul Samuelson
Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he "h ...
where he formalised the concept now known as
public goods
In economics, a public good (also referred to as a social good or collective good)Oakland, W. H. (1987). Theory of public goods. In Handbook of public economics (Vol. 2, pp. 485-535). Elsevier. is a good that is both non-excludable and non-riv ...
, i.e. goods that are both non-rivalrous and non-excludable.
Samuelson additionally highlighted the market failure of the
free-rider problem
In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods (such as public roads or public library), or services of a communal nature do not pay for them or under-p ...
that can occur with non-excludable goods. Samuelson's theory of good classification was then further expanded upon by
Richard Musgrave in 1959, Garret Hardin in 1968 who expanded upon another key market inefficiency of non-excludeable goods; the
tragedy of the commons
Tragedy (from the grc-gre, τραγῳδία, ''tragōidia'', ''tragōidia'') is a genre of drama based on human suffering and, mainly, the terrible or sorrowful events that befall a main character. Traditionally, the intention of tragedy ...
.
Excludability is not an inherent characteristic of a good. Therefore, excludability was further expanded upon by
Elinor Ostrom
Elinor Claire "Lin" Ostrom (née Awan; August 7, 1933 – June 12, 2012) was an American Political science, political scientist and Political economy, political economist whose work was associated with New institutional economics, New Institutio ...
in 1990 to be a continuous characteristic, as opposed to the discrete characteristic proposed by Samuelson (who presented excludability as either being present or absent).
Ostrom's theory proposed that excludability can be placed on a scale that would range from fully excludable (i.e. a good that could theoretically fully exclude non-paying consumers) to fully non-excludeable (a good that cannot exclude non-paying customers at all).
This scale allows producers and providers more in-depth information that can then be used to generate more efficient price equations (for public goods in particular), that would then maximize benefits and positive externalities for all consumers of the good
Definition matrix
Examples
Excludable
![Cubic farebox Vancouver](https://upload.wikimedia.org/wikipedia/commons/5/57/Cubic_farebox_Vancouver.jpg)
The easiest characteristic of an excludable good is that the producer, supplier or managing body of the good, service or resource have been able to restrict consumption to only paying consumers, and excluded non-paying consumers. If a good has a price attached to it, whether it's a one time payment like in the case of clothing or cars, or an ongoing payment like a subscription fee for a magazine or a per-use fee like in the case of public transport, it can be considered to be excludable to some extent.
A common example is a movie in a cinema. Paying customers are given a ticket that would entitle them to a single showing of the movie, and this is checked and ensured by ushers, security and other employees of the cinema. This means that a viewing of the movie is excludable and non-paying consumers are unable to experience the movie.
Semi-Excludable
Ranging between being fully excludable and non-excludable is a continuous scale of excludability that
Ostrom
Ostrom or Öström is a Swedish surname meaning "island stream".
Many of the Ostroms in North America are descendants of a Dutch immigrant to New Amsterdam in the 1600's.
The name was van Oosteroom and originated in the area of Utrecht and sever ...
developed.
Within this scale are goods that either attempt to be excludable but cannot effective or efficiently enforce this excludability. One example concerns many forms of information such as music, movies, e-books and computer software. All of these goods have some price or payment involved in their consumption, but are also susceptible to piracy and
copyright infringement
Copyright infringement (at times referred to as piracy) is the use of works protected by copyright without permission for a usage where such permission is required, thereby infringing certain exclusive rights granted to the copyright holder, s ...
s. This can result in many non-paying consumers being to experience and benefit from the goods from a single purchase or payment.
Non-Excludable
A good, service or resource that is unable to prevent or exclude non-paying consumers from experiencing or using it can be considered non-excludable. An architecturally pleasing building, such as
Tower Bridge
Tower Bridge is a Listed building#Grade I, Grade I listed combined Bascule bridge, bascule and Suspended-deck suspension bridge, suspension bridge in London, built between 1886 and 1894, designed by Horace Jones (architect), Horace Jones and e ...
, creates an
aesthetic
Aesthetics, or esthetics, is a branch of philosophy that deals with the nature of beauty and taste, as well as the philosophy of art (its own area of philosophy that comes out of aesthetics). It examines aesthetic values, often expressed th ...
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
A lighthouse is a tower, building, or other type of physical structure designed to emit light from a system of lamps and lenses and to serve as a beacon for navigational aid, for maritime pilots at sea or on inland waterways.
Lighthouses mar ...
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.
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
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
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
Tragedy (from the grc-gre, τραγῳδία, ''tragōidia'', ''tragōidia'') is a genre of drama based on human suffering and, mainly, the terrible or sorrowful events that befall a main character. Traditionally, the intention of tragedy ...
(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.
Economic theory
Brito and Oakland (1980) study the private, profit-maximizing provision of excludable public goods in a formal economic model. 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. 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.
See also
*
Rivalry
A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry is the "against each other" spirit between two competing sides. The relationship itself may also be called "a rivalry", and each participant ...
*
Free rider problem
In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods (such as public roads or public library), or services of a communal nature do not pay for them or under-p ...
*
Tragedy of the Commons
Tragedy (from the grc-gre, τραγῳδία, ''tragōidia'', ''tragōidia'') is a genre of drama based on human suffering and, mainly, the terrible or sorrowful events that befall a main character. Traditionally, the intention of tragedy ...
References
Further reading
* Excludability, in:
Joseph E. Stiglitz
Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, and a full professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the ...
: ''Knowledge as a Global Public Good'',
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
. Last accessed 29 May 2007
Copyat the
Internet Archive
The Internet Archive is an American digital library with the stated mission of "universal access to all knowledge". It provides free public access to collections of digitized materials, including websites, software applications/games, music, ...
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