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5 Open-Access, Club, & Public Goods

5 Open-Access, Club, & Public Goods

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16.5 Open-Access, Club, & Public
Goods
• Open-Access Common Property
– Open Access Fishery: Anyone can fish in an open-access fishery so it is
nonexclusive, but a fish is rival.
– Problem: Each fisher wants to catch a given fish before others so as to
gain the property right to that fish, even if that means catching fish while
they are still young and small. The lack of clearly defined property rights
leads to overfishing.
– Externality: The social cost of catching a fish is the private cost plus the
externality cost from reduced current and future populations of fish. Thus,
the market failure arising from open-access common property is a
negative externality.
– Other examples: Oil and natural gas reserves, public freeways.

• Solutions to Common Property
– Government regulation that restricts access to the commons (first-come,
first-served basis; entrance fee or tax)
– Assigning Clear Property Rights converts open-access common property
into private property and removes the incentive to overuse it.

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16.5 Open-Access, Club, & Public
Goods
• Club Goods
– Golf or Swim Club: These clubs exclude people who do not pay
membership fees, but the services they provide, swimming or golfing, are
nonrival until full capacity is reached.
– Problem: The marginal cost for the club of accepting an additional member
is close to zero, but clubs charge more than that.
– Externality: The amount of the club good provided is less than the optimal
based on zero marginal cost, so this is a market failure and creates a
deadweight loss.
– Other example: Cable TV

• Solutions to Club Goods
– Although club goods create a market failure, government intervention is
rare because it is difficult for the government to help. Forcing a private
firm to sell products at near zero marginal cost may force the firm to shut
down, and the deadweight loss would be even bigger.

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16.5 Open-Access, Club, & Public
Goods
• Public Goods
– Clean air: Clean air is nonrival and nonexclusive.
– Free rider problem: because clean air is nonexclusive, people
benefit from the cleaning efforts (positive externality) without
paying. Consequently, it is very difficult for firms to profitably
provide clean air or any public good because few people want to
pay for the good no matter how valuable it is to them.
– Externality: public goods tend to be undersupplied by markets.
So, this is a market failure and creates a deadweight loss.
– Other examples: security services, national defense



Solutions to Free Riding
– One solution is for the government to provide these goods.
– Other solutions require governmental or collective actions such as
social pressure, mergers, privatization, and compulsion.

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16.6 Intellectual Property
• Patents
– A patent is a piece of intellectual property that can be treated like any
other type of property. It grants the inventor’s firm the exclusive rights
over the invention for 20 years in the United States and in most other
countries.
– The owner of a patent may choose to be the sole producer of the product,
license others to produce the good for a fee, or sell the patent.
– The patent system greatly reduces the free-rider problem. However, its
key disadvantage is that a patent creates monopoly power.

• Alternatives to Patents
– One important alternative is for the government to fund research by firms
and universities, encouraging the knowledge from the discovery’s public
or open source.
– Another method is to offer a prize for a discovery.

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Managerial Solution
• Managerial Problem
– Should a firm patent its invention or keep it a trade secret? If the innovating
firm manufactures the good itself, under what conditions can it charge the
monopoly price? If the innovating firm obtains a patent, will the firm earn
more if it produces itself or if it licenses its new process to other firms?

• Solution
– A firm may opt for patenting if the extra protection secures income
generation, including license fees. However, the firm may opt for trade
secrets if it is costly to apply for a patent; if the firm may be able to
maintain a secret indefinitely (Coca Cola formula); and if the firm doesn’t
want others to use the patent to create another invention that is sufficiently
different.
– The innovative firm can charge the monopoly price if this price is below the
price of the competitive horizontal supply curve.
– The innovative firm may decide to produce itself as a monopoly or license
the new process to other firms and create a competitive market depending
on how much these firms are willing to pay for the license.

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Figure 16.3 Using Taxes to
Control Pollution

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Table 16.2 Rivalry and Exclusion

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Figure 16.4 Inadequate
Provision of a Public Good

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