Editing Free-rider problem (section)

=== 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}}