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- [Prof. Alex Tabarrok]
In the previous video

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we covered public goods,

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which are nonexcludable,
and nonrival.

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Let's now turn to club goods.

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Club goods are also nonrival,

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but unlike public goods,
they are excludable.

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Let's take Wi-Fi as an example.

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You might need a password
to connect to a Wi-Fi network.

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That's what makes it excludable.

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However, assuming that
there isn't much congestion,

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there's no cost to allowing
more people onto the network.

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Up to a point, therefore,
Wi-Fi is non-rival.

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HBO -- that's another example
of a club good.

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It's excludable --
you have to pay $15.99 a month

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or something like that
to get into the HBO club.

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But more viewers don't add to costs,

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so HBO is also nonrival.

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Markets can provide club goods,

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but at the price
of some inefficiency.

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Imagine for example
that someone is willing to pay

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$8 per month
to watch Game of Thrones.

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The marginal cost of HBO

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providing that viewer
with Game of Thrones --

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it's basically zero.

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The potential viewer
is willing to pay $8,

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which is more than the cost.

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Yet they don't get to watch,

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because the price
of HBO is even higher --

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$15.99 per month.

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This is unlike competitive markets
that we covered earlier,

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where we saw trades get made

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so long as the value
is greater than the cost.

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For club goods, there's some
loss of efficiency in exclusion.

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In excluding this
particular viewer, for example,

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since the benefit to the viewer
is greater than the cost,

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yet that trade is not made.

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Now, the fact that HBO
charters for entry to it's club --

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that means that HBO, however,

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has an incentive to figure out
what viewers really want to watch.

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That's an important benefit.

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The diversity, creativity
and responsiveness of the market

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probably outweighs
the loss of efficiency

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in having the market
produce club goods.

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As we covered in the last video,

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public goods
tend to be under-provided,

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because they cannot
be adequately charged for.

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One solution to this problem

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is figuring out how to turn
a public good into a club good.

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And entrepreneurs
have created excludable goods,

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like cable tv and satellite radio,

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that are alternatives
to the public goods

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of broadcast television and radio.

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Other entrepreneurs
have even discovered ways

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to profit from providing public goods

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even without relying on exclusion.

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How's that possible?

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Radio and broadcast television --
they're public goods.

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They're nonexcludable, and nonrival,

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and yet they are
provided privately by markets.

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In this case, the market overcame
the challenge through advertising.

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Advertising -- it really works
quite well for TV and radio.

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The marginal costs of providing
someone a radio or TV signal --

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it's zero.

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And the price -- it's zero as well.

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Price equals marginal cost --
that's efficient.

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Now, you do have to watch the ads,

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and that's profitable
because they're selling the ad time.

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Here's another familiar example,

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maybe you've heard of it -- Google.

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The search technology
and the database are nonrival.

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Google could exclude
by adding a subscription cost.

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But it chooses not to,

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since it makes more money
by giving the product away for free

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and selling advertising.

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Now let's go back to Wi-Fi.

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It's a very interesting case,

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because we can see Wi-Fi provided
in almost all possible ways.

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It's sold by private firms,
like Sprint,

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who exclude non-payers.

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It's offered free
to attract customers

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at places like Starbucks.

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It's free in other places
if you watch ads.

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And it's even provided for free
by some local governments.

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So we see all types
of provision methods for Wi-Fi,

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and it's not clear
which is the best,

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or even if there is a best method.

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Okay, that's it for club goods.

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Next we'll be looking at
nonexcludable,

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but rival resources --

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the common resources.

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- [Narrator]
If you want to test yourself,

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click "Practice Questions."

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Or, if you're ready to move on,
just click "Next Video."

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♪ [music] ♪