Market failure due to non-rival consumption
- When the good is nonrival, exclusion is inappropriate.
- Because it doesn’t affect the consumption of other individuals
- You don’t need to charge anyone anything to make it fair for everyone.
- But we should note that putting a toll on the highway is good as long as…
- The highway is not too crowded
- Even though the consumption is nonrival, the driver can be charged because the cost of providing the facility is not zero.
- Marginal cost of admitting additional users zero (non-rivalrous) but the cost of providing the facility zero ()
Market fails because “exclusion is inappropriate even if it is feasible”
Market failure due to non-excludability
Consumption is rival, but exclusion though appropriate is not feasible.
- Such exclusions are too costly to be administered
- The exclusion should be but it cannot be applied due to the nature of the good.
The difficulty of applying the exclusion leads to market failure. For example suppose there is a road that is maintained very well and is being used by multiple users. There is rivalry so an exclusion should be done. But it is infeasible because the roads will become too crowded. Imagine a toll on a road with 100 cars.