Question

what detrimental consequences is due to non excludability? explain

Answer 1

DETRIMENTAL CONSQUENCES OF NON-EXCLUDABILITY:

In economics, a good or service is called excludable. A non-excludable good is a good whereby it is not possible to exclude people from using the good or service thereby making it difficult to restrict access to the good or service based on price. By comparison, a good or service is non-excludable if non-paying consumers cannot be prevented from accessing it. Some goods, which we claim as non-excludable are not really non-excludable in the sense that at a certain cost access to these goods can be restricted.

Access fees and walling
Public parks, roads, and public infrastructure are sometimes viewed as non-excludable; however, public parks can charge an entry fee or restrict access based on other criteria by fencing themselves and roads can operate on usage or toll taxes for pedestrian and motor traffic.

Bundling with other excludable goods
Many goods, which we claim are non-excludable, are in fact accessible only to people within a certain geographical region, and hence access to these is restricted to people in that geographical area. Thus, it is possible for those who own property rights to that geographical area to bundle it along with the rights to access to that geographical area. For instance, various public goods that are accessible within a walled community can be paid for through the rents or fees for living in that area.

Detrimental consequences:

1. Non-excludable goods have a free-rider problem. Free-riders are the people who consume the product, but do not pay for it. If non-excludable goods are produced by the free market there will not be enough people paying for the product to warrant firms producing the allocatively efficient quantity as a result the market will tend to under-produce. This is a market failure and creates dead weight loss. Often non-excludable goods will be provided by the government.

Further non-excludability causes another problem – the problem of free riding. If you cannot exclude somebody from using the good then if one person privately provides the good everybody else enjoys the same benefit, but does not have to share in the cost so this incentive to people to not pay for provision of the public good in the hope that others will do so this is especially a problem in the context of revealed preferences. If you would be interested in having a public good provided, but think that somebody else is equally or maybe even more interested in it, you have an incentive to understate the extent to which you want it, so that they think you will not pay for it and that if they want it they will have to pay for it themselves. In that way, you can free ride off the public good being paid for by someone else but if everyone free rides nobody provides the good. An example of a non-excludable good is fireworks display in a densely populated area. It would be quite easy for people to enjoy the fireworks display from their roofs, yards, or a nearby street without paying for it.

2. A non-excludable public good is effectively a positive externality or (a public bad is a negative externality). If you clean up the environment then you cannot prevent other people from enjoying a cleaner environment – this is a non-excludable public good and a positive externality. Excluding anyone from consuming a public good would be inefficient.

3. An important similarity exists between problems involving the provision of public goods and collective action problems—such as voting, public protest or output restriction in the case of oligopolists — where an individual typically cannot be prevented from benefiting from the achievement of the goal of the collective action if it is achieved. In such cases, the achievement of the goal can be thought of as a non-excludable good. Consequently, it is often thought that individuals may have little incentive to contribute to its achievement — by turning out to vote or participating in a protest — if they view the act of contribution as in itself costly and unlikely to have a significant impact on whether the collective goal is achieved.

4. One aspect of the collective action problem is that posed by collective or public goods. A collective good is one that is economically infeasible to exclude people from using. Hence, if a collective good—such as collective wage bargaining for an industry—is provided by an organization such as a trade union, then the fruits of that bargaining will be enjoyed by all workers, not only the trade unionists. Other workers in the industry who gain the wage increases and better working conditions provided by that bargaining will not have to pay the union dues and will free ride upon the activities of the union.

5. Finding in experimental psychology suggests that individuals have an S-shaped utility curve. This means that losses of a given amount matter more than gains of a similar amount. This seems to lead to the finding that it is easier to mobilize people when interests currently being satisfied are threatened than to promote interests not yet satisfied.

6. One important aspect of the production function is created by the nature of the collective good. “One-off” goods are typified by a “step” function. Mobilization requires an action to provide the good, and, once the good has been supplied, the action is over. Goods in continual supply require continuous collective action, which may be harder to sustain in the long run.

7. Markets for public goods will only exist if non purchasers can be excluded, there are no markets for non-excludable public goods so usually if government does not provide it then nobody will. National defence is an example of a non-excludable public good. However health and education are not entirely public goods in the same way as there is an element of rivalry to them – if you are receiving some drugs in treatment for an illness then you are using them up, no other consumer can use them at the same time.

Therefore, non-excludable in terms of public goods and services has more detrimental consequences because of its useage and availability to general public.