economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

, 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 " ...

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 i ...

. 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 scientist and political economist whose work was associated with New Institutional Economics and the resurgence of political economy. In 2009, ...

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

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 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. 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 Grade I listed combined bascule and suspension bridge in London, built between 1886 and 1894, designed by Horace Jones and engineered by John Wolfe Barry with the help of Henry Marc Brunel. It crosses the River Thames clos ...

, 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 t ...

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 m ...

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

(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 In economic theory, the field of contract theory can be subdivided in the theory of complete contracts and the theory of incomplete contracts. In contract law, an incomplete contract is one that is defective or uncertain in a material respect. A c ...

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.