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== Economic and political solutions == === Assurance contracts === {{Main|Assurance contract}} An assurance contract is a contract in which participants make a binding pledge to contribute to building a public good, contingent on a quorum of a predetermined size being reached, otherwise the good is not provided and any monetary contributions are refunded.<ref name="Provision of Public Goods">{{cite web |last1=Bagnoli |first1=Mark |last2=Lipman |first2=Barton L. |title=Provision of Public Goods: Fully Implementing the Core through Private Contributions |url=http://restud.oxfordjournals.org/content/56/4/583.short |website=Oxford Journals |publisher=[[The Review of Economic Studies]] |archive-date=2014-03-05|archive-url=https://web.archive.org/web/20140305084738/http://restud.oxfordjournals.org/content/56/4/583.short}}</ref> A [[dominant assurance contract]] is a variation in which an entrepreneur creates the contract and refunds the initial pledge plus an additional sum of money if the quorum is not reached. The entrepreneur profits by collecting a fee if the quorum is reached and the good is provided. In terms of [[game theory]], this makes pledging to build the public good a dominant strategy: the best move is to abide by the contract regardless of the actions of others.<ref>{{Cite web |url=http://mason.gmu.edu/~atabarro/PrivateProvision.pdf |title=The private provision of public goods via dominant assurance |access-date=16 October 2013 |archive-url=https://web.archive.org/web/20130112223855/http://mason.gmu.edu/~atabarro/PrivateProvision.pdf |archive-date=12 January 2013 |url-status=live |df=dmy-all }}</ref> === Coasian solution === A [[Coasian solution]], named for the economist [[Ronald Coase]], proposes that potential beneficiaries of a public good can negotiate to pool their resources and create it, based on each party's self-interested willingness to pay. His treatise, ''[[The Problem of Social Cost]]'' (1960), argued that if the [[transaction cost]]s between potential beneficiaries of a public good are low—that it is easy for potential beneficiaries to find each other and organize pooling their resources based upon the good's value to each of them—that public goods could be produced without government action.<ref name=Coase1960>{{cite journal |last=Coase |first=Ronald |journal=Journal of Law and Economics |date=October 1960 |volume=3 |pages=1–44 |doi=10.1086/466560 |title=The Problem of Social Cost|s2cid=222331226 }}</ref> Much later, Coase himself wrote that while what had become known as the Coase Theorem had explored the implications of zero-transaction costs, he had actually intended to use this construct as a stepping stone to understand the real world of positive transaction costs, corporations, legal systems and government actions:<ref>{{cite web |last=Fox |first=Glenn |title=The Real Coase Theorems |url=http://www.canadianjusticereviewboard.ca/archive-Dr._Glenn_Fox_on_The_Real_Coase_Theorems.pdf |website=Cato Journal 27, Fall 2007 |publisher=Cato Institute, Washington, D.C. |access-date=17 February 2014 |url-status=dead |archive-url=https://web.archive.org/web/20130723053515/http://www.canadianjusticereviewboard.ca/archive-Dr._Glenn_Fox_on_The_Real_Coase_Theorems.pdf |archive-date=23 July 2013}}</ref><ref name="Coase1988_1">{{cite book |last=Coase |first=Ronald |title=The Firm, the Market and the Law |year=1988 |publisher=University of Chicago Press |location=Chicago, Illinois |page=13}}</ref><blockquote>I examined what would happen in a world in which transaction costs were assumed to be zero. My aim in doing so was not to describe what life would be like in such a world but to provide a simple setting in which to develop the analysis and, what was even more important, to make clear the fundamental role which transaction costs do, and should, play in the fashioning of the institutions which make up the economic system.</blockquote>Coase also wrote:<blockquote>The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave. What I did in "The Problem of Social Cost" was simply to shed light on some of its properties. I argued in such a world the allocation of resources would be independent of the legal position, a result which Stigler dubbed the "Coase theorem".<ref name="Coase1988_2">{{cite book |title=The Firm, the Market and the Law |last=Coase |first=Ronald |publisher=University of Chicago Press |year=1988 |location=Chicago, Illinois |page=174}}</ref></blockquote> Thus, while Coase himself appears to have considered the "Coase theorem" and Coasian solutions as simplified constructs to ultimately consider the real 20th-century world of governments, laws, and corporations, these concepts have become attached to a world where transaction costs were much lower and government intervention would unquestionably be less necessary. ====Fundraising==== {{multiple issues|section=yes|{{verify section|date=August 2021}} {{original research section|date=August 2021}}}} A minor alternative, especially for information goods, is for the producer to refuse to release a good to the public until payment to cover costs is met. For instance, [[Stephen King]] authored chapters of a new novel downloadable for free on his website while stating that he would not release subsequent chapters unless a certain amount of money was raised. Sometimes dubbed ''holding for ransom'', this method of public goods production is a modern application of the [[street performer protocol]] for public goods production. Unlike assurance contracts, its success relies largely on social norms to ensure (to some extent) that the threshold is reached and partial contributions are not wasted. One of the purest Coasian solutions today is the new phenomenon of Internet [[crowdfunding]],<ref>{{Cite web |title=Crowdfunding: What It Is, How It Works, and Popular Websites |url=https://www.investopedia.com/terms/c/crowdfunding.asp |access-date=2024-07-01 |website=Investopedia |language=en}}</ref> in which case rules are enforced by computer algorithms and legal contracts, as well as social pressure. For example, on the [[Kickstarter]] site, each funder authorizes a credit card purchase to buy a new product or receive other promised benefits, but no money changes hands until the funding goal is met.<ref name=kick>{{cite web |title=Kickstarter FAQ |url=https://www.kickstarter.com/help/faq/kickstarter+basics?ref=faq_nav#Kick |access-date=17 February 2014 |archive-url=https://web.archive.org/web/20140226050118/https://www.kickstarter.com/help/faq/kickstarter+basics?ref=faq_nav#Kick |archive-date=26 February 2014 |url-status=live |df=dmy-all }}</ref> Because automation and the Internet greatly reduce the transaction costs for pooling resources, project goals of only a few hundred dollars are frequently crowdfunded, far below the costs of soliciting traditional investors. === Introducing an exclusion mechanism (club goods) === {{More citations needed|section|date=August 2021}} Another solution, which has evolved for information goods, is to introduce exclusion mechanisms which turn public goods into [[club good]]s. One well-known example is [[copyright]] and [[patent]] laws. These laws, which in the 20th century came to be called [[intellectual property]] laws, attempt to remove the natural non-excludability by prohibiting reproduction of the good. Although they can address the free rider problem, the downside of these laws is that they imply private monopoly power and thus are not [[Pareto-optimal]]. For example, in the United States, the patent rights given to pharmaceutical companies encourage them to charge high prices (above [[marginal cost]])<!--I'm hiding this, not removing it, just in case.{{Dubious|date=August 2011| reason=Patents encourage pharmaceutical research (which is absurdly expensive) by allowing companies to have some time to recuperate their losses via market monopoly. If a company had to share the market immediately, they would be unlikely to recover the amount lost during research. See "generic competition paradox", which shows that it is actually the loss of the patent that causes prices to skyrocket.}}--> and to advertise to convince patients to persuade their doctors to prescribe the drugs.{{Dubious|date=August 2011| reason= Advertising is done by companies that don't have patents, too. The choice to advertise is completely unrelated to patents}} Likewise, copyright provides an incentive for publishers to take older works [[out of print]] so as not to cannibalize revenue from newer works. An example from the entertainment industry is [[Walt Disney Studios Home Entertainment]]'s "[[Disney Vault|vault]]" sales practice, and an example from the technology industry is [[Microsoft]]'s decision to pull [[Windows XP]] from the market in mid-2008 to drive revenue from the widely criticized [[Windows Vista]] operating system.{{citation needed|date=March 2021}} Intellectual property laws also end up encouraging patent and copyright owners to sue even mild imitators in court and to lobby for the extension of the term of the exclusive rights in a form of [[rent seeking]]. These problems with the club-good mechanism arise because the underlying [[marginal cost]] of giving the good to more people is low or zero, but because of the limits of [[price discrimination]], those who are unwilling or unable to pay a profit-maximizing price do not gain access to the good. If the costs of the exclusion mechanism are not higher than the gain from the collaboration, club goods can emerge naturally. [[James M. Buchanan]] showed in his seminal paper that clubs can be an efficient alternative to government interventions.<ref>James M. Buchanan (February 1965). "An Economic Theory of Clubs". Economica. 32 (125): 1–14. doi:10.2307/2552442. JSTOR 2552442.</ref> On the other hand, the inefficiencies and inequities of club goods exclusions sometimes cause potentially excludable club goods to be treated as public goods, and their production financed by some other mechanism.{{efn|Examples of such "natural" club goods include [[Natural monopoly|natural monopolies]] with very high fixed costs, private golf courses, cinemas, cable television and social clubs.}} This explains why many such goods, often known as ''social goods'', are often provided or subsidized by governments, co-operatives, or volunteer associations, rather than being left to be supplied by profit-minded entrepreneurs. [[Joseph Schumpeter]] claimed that the "excess profits" (or profits over normal profit) generated by the copyright or patent monopoly will attract competitors that would make technological innovations and thereby end the monopoly. This is a continual process referred to as "Schumpeterian [[creative destruction]]", and its applicability to different types of public goods is a source of some controversy. Supporters of the theory point to cases such as that of Microsoft, which has been increasing its prices (or lowering its products' quality), predicting that these practices will make increased market shares for [[Linux]] and [[Apple Inc.|Apple]] largely inevitable.{{Citation needed|date=May 2011}} A nation can be considered akin to a club whose members are its citizens. The government would then be the manager of this club. This is further studied in the [[theory of the state]].{{citation needed|date=January 2020}} ===Non-altruistic social sanctions (common property regimes)=== Often on the foundation of game theory, experimental literature suggests that free-riding situations can be improved without any state intervention by seeking to measure the effects of various forms of social sanctions. Peer-to-peer punishment, that is, when members sanction other members that do not contribute to the common pool resource by inflicting a cost on "free-riders", is considered sufficient to establish and maintain cooperation.<ref>{{cite journal |author1=Elinor Ostrom |author2=James Walker |author3=Roy Gardner |s2cid=155015135 |author-link1=Elinor Ostrom |title=Covenants With and without a Sword: Self-Governance Is Possible |journal=[[American Political Science Review]] |date=June 1992 |volume=86 |issue=2 |pages=404–17 |doi=10.2307/1964229|jstor=1964229 }}</ref><ref>Fehr, E., & S. Gächter (2000) "Cooperation and Punishment in Public Goods Experiments"'', 90 American Economic Review'' 980.</ref> Social actions come at a cost to the punisher, which discourages individuals from taking action to punish the free-rider. Therefore, punishers often need to be rewarded for following through with their punishment for the resource to be effectively managed. Unlike a prisoner's dilemma where the prisoners are prohibited from communicating and strategizing, people can get together to form "common property regimes" in which the group weighs the costs and benefits of rewarding individuals for sanctioning free riders.<ref name="Understanding Institutional Diversity"/> So long as the benefits of preserving the resource outweigh the cost of communication and enforcement, members often compensate punishers for sanctioning free riders.<ref name="Governing the Commons">{{cite book |last1=Ostrom |first1=Elinor |title=Governing the Commons |date=1990 |publisher=Cambridge University Press| isbn= 0521405998}}</ref> While the outcome is not [[Pareto-optimal]], as the group has the additional cost of paying for enforcement, it is often less costly than letting the resource deplete. In the limiting case, where the costs of bargaining and enforcement approach zero, the setup becomes Coasian as the solution approaches the Pareto-optimal solution. Both punishment and regulation by the state work relatively badly under imperfect information, where people cannot observe the behavior of others.<ref>{{cite journal |last1=Kristoffel Grechenig |first1=Nicklisch |last2=Thöni |first2=C. |year=2010 |title=Punishment despite reasonable doubt – a public goods experiment with sanctions under uncertainty |ssrn=1586775 |journal=Journal of Empirical Legal Studies |volume=7 |issue=4 |pages=847–67 |doi=10.1111/j.1740-1461.2010.01197.x |s2cid=41945226 |url=https://www.alexandria.unisg.ch/71109/1/GrechenigNicklischTh%C3%B6ni2010JELS%20Punishment%20Despite%20Reasonable%20Doubt-A%20Public%20Goods%20Experiment%20with%20Sanctions%20Under%20Uncertainty.pdf |access-date=2023-01-03 |archive-date=2023-01-29 |archive-url=https://web.archive.org/web/20230129190656/https://www.alexandria.unisg.ch/71109/1/GrechenigNicklischTh%C3%B6ni2010JELS%20Punishment%20Despite%20Reasonable%20Doubt-A%20Public%20Goods%20Experiment%20with%20Sanctions%20Under%20Uncertainty.pdf |url-status=dead }}</ref> <ref name="Governing the Commons"/> Often common property regimes which members establish through bargaining have more information about the specific common pool resource which they are managing than outsiders. For this reason, and because common property regimes can avoid the [[principal-agent problem]], the specific local knowledge within common property regimes typically enables them to outperform regulations designed by outside technical experts.<ref name="Governing the Commons"/> Nevertheless, the best performance is typically achieved when people in common property regimes consult with governments and technical experts while deciding on the rules and design of their firm, thereby combining local and technical knowledge.<ref name="Governing the Commons"/><ref name="Understanding Institutional Diversity"/>
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