Buchanan-An Economic Theory of Clubs

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AN ECONOMIC THEORY OF CLUBS

JAMES M. BUCHANAN

9/2/2009 1 [email protected]

JOHNNY PATTA

KK PENGELOLAAN PEMBANGUNAN DAN PENGEMBANGAN KEBIJAKANSAPPK - ITB

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• The implied institutional setting for neo-classical economic

theory, including theoretical welfare economics, is a regime ofprivate property, in which all goods and services are privately(individually) utilized or consumed

• Only within the last two decades have serious attempts beenmade to extend the formal theoretical structure to includecom- munal or collective ownership-consumptionarrangements

• The "pure theory of public goods“ remains in its infancy, andthe few models that have been most rigorously developed

apply only to polar or extreme cases



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• For example, in the fundamental papers by Paul A.Samuelson, a sharp conceptual distinction is made betweenthose goods and services that are "purely private" and thosethat are "purely public"

•

No general theory has been developed which covers thewhole spectrum of ownership-consumption possibilities,ranging from the purely private or individualized activity onthe one hand to purely public or col- lectivized activity on theother

• One of the missing links here is "a theory of clubs", a theoryof co-operative membership, a theory that will include as avariable to be determined the extension of ownership-consumption rights over differing numbers of persons

9/2/2009 [email protected] 3


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• Everyday experience reveals that there exists some mostpreferred or " optimal" membership for almost any activity inwhich we engage, and that this membership varies in some

relation to economic factors• European hotels have more communally shared bathrooms

than their American counterparts• Middle and low income communities organize swimming-

bathing facilities; high income communities are observed toenjoy privately owned swimming pools





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• For the former, the optimal sharing arrangement, thepreferred club membership, is clearly one person (orone family unit), whereas the optimal sharing group forthe purely public good, as defined in the polar sense,includes an infinitely large number of members

•

That is to say, for any genuinely collective good definedin the Samuelson way, a club that has an infinitely largemembership is preferred to all arrangements of finitesize

• While it is evident that some goods and services maybe reason- ably classified as purely private, even in theextreme sense, it is clear that few, if any, goods satisfythe conditions of extreme collectiveness





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• The interesting cases are those goods andservices, the consumption of which involvessome "publicness", where the optimal sharinggroup is more than one person or family but

smaller than an infinitely large number• The central question in a theory of clubs is

that of determining the membership margin,so to speak, the size of the most desirable costand consumption sharing arrangement





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• With purely private goods, consumption by oneindividual automatically reduces potentialconsumption of other individuals by an equalamount. With purely public goods, consumption byany one individual implies equal consumption by allothers

• For goods falling between such extremes, such adistinction must be made. This is because for suchgoods there is no unique translation possiblebetween the "goods available to the membershipunit" and "goods finally consumed"



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• Arguments that represent the size of the sharing group must be includedin the utility function along with arguments representing goods andservices

• For any good or service, regardless of its ultimate place along theconceptual public-private spectrum, the utility that an individual receivesfrom its consumption depends upon the ntumber of other persons withwhom he must share its benefits

• This is obvious, but its acceptance does require breaking out of the privateproperty straitjacket within which most of economic theory has developed

• Given any quantity of final good, as defined in terms of the physical unitsof some standard quality, the utility that the individual receives from this

quantity will be related functionally to the number of others with whomhe shares





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• The geometrical construction implies that the necessarymarginal conditions are satisfied at unique equilibrium valuesfor both goods quantity and club size

• This involves an oversimplification that is made possible onlythrough the assumptions of specific cost-sharing schemes andidentity among individuals. In order to generalize the results,these restrictions must be dropped

• We know that, given any group of individuals who are able toevaluate both consumption shares and the costs ofcongestion, there exists some set of marginal prices, goods

quantity





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• However, the quantity of the good, the size of the club sharingin its consumption, and the cost-sharing arrangements mustbe determined simultaneously

• And, since there are always "gains from trade" to be realizedin moving from non-optimal to optimal positions,distributional consider- ations must be introduced.

• Once these are allowed to be present, the final "solution" canbe located at any one of a sub-infinity of points on the Paretowelfare surface. Only through some quite arbitrarily chosen

conventions can standard geometrical constructions be madeto apply





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• The approach used above has been to impose at the outset a

set of marginal prices (tax-prices, if the good is suppliedpublicly), translated here into shares or potential shares in thecosts of providing separate quantities of a specific good forgroups of varying sizes

• Hence, the individual confronts a predictable set of marginalprices for each quantity of the good at every possible clubsize, independently of his own choices on these variables

• With this convention, and the world-of- equals assumption,the geometrical solution becomes one that is relevant for any

individual in the group. If we drop the world-of-equalsassumption, the construction continues to hold withoutchange for the choice calculus of any particular individual inthe group



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• The results cannot, of course, be generalized for thegroup in this case, since different individuals willevaluate any given result differently

• The model remains helpful even here, however, inthat it suggests the process through which individualdecisions may be made, and it tends to clarify someof the implicit content in the more formal state-ments of the necessary marginal conditions for

optimality





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• The theory of clubs developed in this paper applies in the

strict sense only to the organization of membership or sharingarrangements where " exclusion" is possible

• In so far as non-exclusion is a characteristic of public goodssupply, as Musgrave has suggested,2 the theory of clubs is oflimited relevance. Nevertheless, some implications of thetheory for the whole excludability question may be indicated

• If the structure of property rights is variable, there wouldseem to be few goods the services of which are non-excludable, solely due to some physical attributes. Hence, the

theory of clubs is, in one sense, a theory of optimal exclusion,as well as one of inclusion





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• Physical exclusion is possible, given sufficientflexibility in property law, in almost all imaginablecases, including those in which the interdependencelies in the act of consuming itself

• Take the single person who gets an inoculation,providing immunization against a communicabledisease. In so far as this action exerts externalbenefits on his fellows, the person taking the actioncould be authorized to collect charges from allbeneficiaries under sanction of the collectivity





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• If they are not, the " free rider " problem arises. This prospect suggests

one issue of major importance that the analysis of this paper hasneglected, the question of costs that may be involved in securingagreements among members of sharing groups

• If individuals think that exclusion will not be fully possible, that they canexpect to secure benefits as free riders without really becoming full-fledged contributing members of the club, they may be reluctant to enter

voluntarily into cost-sharing arrangements• This suggests that one important means of reducing the costs of securing

voluntary co-operative agreements is that of allowing for more flexibleproperty arrangements and for introducing excluding devices

• If the owner of a hunting preserve is allowed to prosecute poachers, then

prospective poachers are much more likely to be willing to pay for thehunting permits in advance





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Buchanan-An Economic Theory of Clubs