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Club goods (also artificially scarce goods) are a type of good in economics, sometimes classified as a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs. These goods are often provided by a natural monopoly. Club goods have artificial scarcity. Club theory is the area of economics that studies these goods.
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Where club goods are found
Examples of club goods include, cinemas, cable television, access to copyrighted works, and the services provided by social or religious clubs to their members. The EU is also treated as a club good.
Public goods with benefits restricted to a specific group may be considered club goods. For example, expenditures that benefit all of the children in a household but not the adults. The existence of club goods for kids may offset the effects of sibling competition for private investments in larger families.
Club goods in Israel
Analyzing Ultra-Orthodox Jews in Israel, economist Eli Berman writes:
Religious prohibitions can be understood as an extreme tax on secular activity outside the club which substitutes for charitable activity within the club. A religious community lacking tax authority or unable to sufficiently subsidize charitable activity may choose prohibitions to increase this activity among members. Sabbath observance and dietary restrictions, for instance, can be rationalized with that approach. In this context the increased stringency of religious practice is an efficient communal response to rising real wages and to increased external subsidies.
Club theory
James M. Buchanan developed club theory (the study of club goods in economics) in his 1965 paper, "An Economic Theory of Clubs". He wrote that there was an "awesome Samuelson gap between the purely private and purely public good". This gap contained goods that were excludable but shared by more people than typically share a private good but fewer people than typically share a public good. The goal of his theory was to address the question of determining the "size of the most desirable cost and consumption sharing arrangement".
The two examples of private goods that Buchanan offered to illustrate this concept were hair cuts and shoes. Two people can't wear the same exact pair of shoes at the same time, but two or more people can take turns wearing them. As the number of people sharing the same pair of shoes increases, the amount of utility each person derives from the shoes diminishes. Using the example of a swimming pool facility:
As more persons are allowed to share in the enjoyment of the facility, of given size, the benefit evaluation that the individual places on the good will, after some point, decline. There may, of course, be both an increasing and a constant range of the total benefit function, but at some point congestion will set in, and his evaluation of the good will fall.But each new member (or co-owner) helps reduce the cost of the club good, so there will be some optimal size of the good that maximizes the benefit for its members:
However, the quantity of the good, the size of the club sharing in its consumption, and the cost-sharing arrangements must be determined simultaneously. And, since there are always "gains from trade" to be realized in moving from non-optimal to optimal positions, distributional considerations must be introduced. Once these are allowed to be present, the final "solution" can be located at any one of the sub-infinity points on the Pareto welfare surface. Only through some quite arbitrarily chosen conventions can standard geometrical constructions be made to apply.