How Insurance Works

Club Goods


♪ [music] ♪ – [Prof. Alex Tabarrok]
In the previous video we covered public goods, which are nonexcludable,
and nonrival. Let’s now turn to club goods. Club goods are also nonrival, but unlike public goods,
they are excludable. Let’s take Wi-Fi as an example. You might need a password
to connect to a Wi-Fi network. That’s what makes it excludable. However, assuming that
there isn’t much congestion, there’s no cost to allowing
more people onto the network. Up to a point, therefore,
Wi-Fi is non-rival. HBO — that’s another example
of a club good. It’s excludable —
you have to pay $15.99 a month or something like that
to get into the HBO club. But more viewers don’t add to costs, so HBO is also nonrival. Markets can provide club goods, but at the price
of some inefficiency. Imagine for example
that someone is willing to pay $8 per month
to watch Game of Thrones. The marginal cost of HBO providing that viewer
with Game of Thrones — it’s basically zero. The potential viewer
is willing to pay $8, which is more than the cost. Yet they don’t get to watch, because the price
of HBO is even higher — $15.99 per month. This is unlike competitive markets
that we covered earlier, where we saw trades get made so long as the value
is greater than the cost. For club goods, there’s some
loss of efficiency in exclusion. In excluding this
particular viewer, for example, since the benefit to the viewer
is greater than the cost, yet that trade is not made. Now, the fact that HBO
charters for entry to it’s club — that means that HBO, however, has an incentive to figure out
what viewers really want to watch. That’s an important benefit. The diversity, creativity
and responsiveness of the market probably outweighs
the loss of efficiency in having the market
produce club goods. As we covered in the last video, public goods
tend to be under-provided, because they cannot
be adequately charged for. One solution to this problem is figuring out how to turn
a public good into a club good. And entrepreneurs
have created excludable goods, like cable tv and satellite radio, that are alternatives
to the public goods of broadcast television and radio. Other entrepreneurs
have even discovered ways to profit from providing public goods even without relying on exclusion. How’s that possible? Radio and broadcast television —
they’re public goods. They’re nonexcludable, and nonrival, and yet they are
provided privately by markets. In this case, the market overcame
the challenge through advertising. Advertising — it really works
quite well for TV and radio. The marginal costs of providing
someone a radio or TV signal — it’s zero. And the price — it’s zero as well. Price equals marginal cost —
that’s efficient. Now, you do have to watch the ads, and that’s profitable
because they’re selling the ad time. Here’s another familiar example, maybe you’ve heard of it — Google. The search technology
and the database are nonrival. Google could exclude
by adding a subscription cost. But it chooses not to, since it makes more money
by giving the product away for free and selling advertising. Now let’s go back to Wi-Fi. It’s a very interesting case, because we can see Wi-Fi provided
in almost all possible ways. It’s sold by private firms,
like Sprint, who exclude non-payers. It’s offered free
to attract customers at places like Starbucks. It’s free in other places
if you watch ads. And it’s even provided for free
by some local governments. So we see all types
of provision methods for Wi-Fi, and it’s not clear
which is the best, or even if there is a best method. Okay, that’s it for club goods. Next we’ll be looking at
nonexcludable, but rival resources — the common resources. – [Narrator]
If you want to test yourself, click “Practice Questions.” Or, if you’re ready to move on,
just click “Next Video.” ♪ [music] ♪


Reader Comments

  1. Thank you very much! Very good production and good examples. Appreciate the effort you guys put on this

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