The theory of externalities, public goods, and club goods: Homogeneous clubs and local public goods

TLDR: In this paper, the authors define a club as a group of individuals who derive mutual benefit from sharing one or more of the following: production costs, the members' characteristics, or a good characterized by excludable benefits.

Abstract: A club is a voluntary group of individuals who derive mutual benefit from sharing one or more of the following: production costs, the members' characteristics, or a good characterized by excludable benefits. When production costs are shared and the good is purely private, a private good club is being analyzed (McGuire 1972; Wiseman 1957). If membership characteristics differ and motivate sharing, then membership fees will differ among members (DeSerpa 1977; Scotchmer 1994b; Scotchmer and Wooders 1987). Such fees are nonanonymous , inasmuch as a fee structure is related to the identity and attributes of a member. The focus of our analysis is the sharing of an excludable (rivalrous) public good, which we term a club good . Unless otherwise specified, crowding is assumed to be independent of the individual and hence anonymous. A number of aspects of the club definition deserve highlighting. Privately owned and operated clubs must be voluntary; members choose to belong because they anticipate a net benefit from membership. Thus, the utility jointly derived from membership and from the consumption of other goods must exceed the utility associated with nonmembership status. Furthermore, the net gain in utility from membership must exceed or equal membership fees or toll payments. This voluntarism serves as the first characteristic by which to distinguish between pure public goods and club goods. In the case of a pure public good, voluntarism may be absent, since the good might harm some recipients (e.g., defense to a pacifist, fluoridation to someone who opposes its use).