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Posts Tagged ‘public good’

How is Wikipedia funded?

Wikipedia logo: source Wikimnedia CommonsWikipedia is a free on-line encyclopedia which is compiled and maintained by some of the people who use it regularly. It has been estimated that on any given day 15% of all internet users visit the website. Anyone can write new articles or edit existing material. The encyclopedia has over 5 million entries. So how is it financed?

If you visit the Wikipedia website at the moment you will be greeted by the following message:

DEAR READERS, We’ll get right to it: This week we ask you to help Wikipedia. To protect our independence, we’ll never run ads. We’re sustained by donations averaging about £10. Only a tiny portion of our readers give. If everyone reading this right now gave £2, our fundraiser would be done within an hour. That’s right, the price of a cup of coffee is all we need. We’re non-profit with costs of a top website: servers, staff and programs. We believe everyone should have access to free knowledge, without restriction or limitation. If Wiki We believe everyone should have access to free knowledge, without restriction or limitation. If Wikipedia is useful to you, please take one minute to keep our work going another year. Thank you.pedia is useful to you, please take one minute to keep our work going another year. Thank you.

Wikipedia Foundation, the not-for-profit company that manages the Wikipedia website, has been running these donation drives for a number of years. The 2014/15 financial year was their most successful to date as 4 million donations were made by people from all over the world. A total of $75 million was raised compared with $15 million in 2009/10. Although the average contribution was $15.20 in 2014/15, some people contributed over $250,000!

Many of you studying economics might find these figures surprising as Wikipedia would appear to have some of the characteristics associated with public goods. On the one hand, the material is perfectly non-rival. If someone decides to read an entry on Wikipedia it does not prevent other users from being able to read the same article. The article does not get used up or depleted in the act of being read. On the other hand, however, it is possible to exclude non-payers from gaining access to the material. For example in June 2010, the Times and Sunday Times introduced a subscription service for access to on-line versions of the newspapers. The New York Times recently announced that it had one million digital subscribers. However given its non-rivalrous nature, material could be shared between payers and non-payers. Groups of people could even get together and share one subscription.

The statement provided by Wikipedia clearly expresses the importance it attaches to free access. Given that it is non-rivalrous in consumption and free of charge to all users, does economic theory predict that people will (i) make voluntary monetary donations (ii) contribute and edit the on-line entries?

If all users are driven by narrowly self-interested preferences and act in a rational manner, then they will not pay and no donations will be made. People will choose to free ride as they can read exactly the same material whether they have paid for it or not.

Given the results of the fund-raising drive are so at odds with this prediction, it suggests that a significant number of Wikipedia users have either altruistic preferences and/or respond to social norms.

If a rational self-interested person receives no monetary payment for writing or editing an entry would they ever contribute to the website? Given the effort involved it would seem highly unlikely. However the Wikipedia website claims that over 125,000 people contribute regularly. They are referred to as ‘Wikipedians’.

One possible explanation for this behaviour is that some individuals gain utility/pleasure from other people reading and finding their entries both useful and interesting. This utility might increase with the number of potential readers. Therefore keeping access free is a motivating factor for a number of contributors as it maximises the potential readership of their entries. However, the number of contributors fell by a one third between 2007 and 2014.

An interesting question is whether the quantity and quality of contributions would increase if Wikipedia implemented a subscription service which generated enough revenue to enable contributors to be paid but also significantly reduced the number of users.

An alternative way of generating revenue would be to allow advertisements on the website while keeping access free of charge. This option has been resisted so far.

Articles
The Wikipedia fundraising banner sad but untrue Wikipediocracy, The Masked Maggot and friends (11/12/2014)
Newsonomics:10 numbers on the New York times 1 million digital-subscriber milestone Nieman. Ken Doctor (6/8/2015)
The trouble with “Free Riding” Freedom to tinker, Timothy B. Lee (24/8/2008)
The future of Wikipedia: Wikipeaks? The Economist (1/3/2014)

Wikimedia publications
Fundraising report 2014-2015 Wikimedia foundation (26/10/2015)
Wikipedia community

Questions

  1. How do economists classify goods or services that have a low degree of rivalry but where it is relatively easy to exclude non-payers? Give some real world examples to illustrate your answer.
  2. How do economists classify goods and services that have a high degree of rivalry but where it is relatively difficult to exclude non-payers? Give some real world example to illustrate your answer.
  3. Explain why an economically rational individual might still make a donation towards the running of the Wikipedia website.
  4. Why do you think the number of contibutors has fallen?
  5. People often complain that Wikipedia entrees are badly written and contain numerous mistakes. To what extent do you think that paying contributors would help to overcome this problem?
  6. What are the possible advantages/disadvantages of financing Wikipedia by using advertising revenue?
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Paying for a public good: will it Wash?

Much of the east coast of England is subject to tidal flooding. One such area is the coastline around the Wash, the huge bay between Norfolk and Lincolnshire. Most of the vulnerable shorelines are protected by sea defences, usually in the form of concrete walls or earth embankments, traditionally paid for by the government. But part of the Norfolk shoreline is protected by shingle banks, which require annual maintenance.

Full government funding for maintaining these banks ended in 2013. According to new government rules, only projects that provide at least £8 of benefits for each £1 spent would qualify for such funding to continue. The area under question on the Norfolk cost of the Wash does not qualify.

Between 2013 and 2015 the work on the shingle banks is being paid for by the local council charging levies. After that, the plan is for a partnership-funding approach, where the government will make a (small) contribution as long as the bulk of the funding comes from the local community. This will involve setting up a ‘community interest company’, which will seek voluntary contributions from local residents, landowners and businesses.

Sea defences are a public good, in that it is difficult to exclude people benefiting who choose not to pay. In other words, there is a ‘free rider’ problem. However, in the case of the Wash shoreline in question, one borough councillor, Brian Long, argues that it might be possible to maintain the flood defences to protect those who do contribute while ignoring those who do not.

Not surprisingly, many residents and businesses argue that the government ought to fund the defences and, if it does have to be financed locally, then everyone should be required to pay their fair share.

Radio podcast
Holding back the sea BBC Radio 4, David Shukman (19/11/14)

Articles
What is the price of holding back the sea? BBC News, David Shukman (19/11/14)
Firms will have to pay towards cost of sea defences between Heacham and Wolferton in West Norfolk EDP24, Chris Bishop (1/8/14)
Businesses between Snettisham and Hunstanton will have to pay for flood defences. EDP24, Chris Bishop (19/11/14)
Wash and west Norfolk sea defence repairs now under way BBC News (13/12/13)

Consultation document
Managing our coastline Borough Council of King’s Lynn and West Norfolk, Environment Agency

Questions

  1. What are the two main features of a public good? Are sea defences a pure public good?
  2. Is there a moral hazard if people choose to live in a coastal area that would be subject to flooding without sea defences?
  3. Who is the ‘public’ in the case of sea defences? Is it the whole country, or the local authority or just all those being protected by the defences?
  4. What are the problems with relying on voluntary contributions to fund, or partly fund, sea defences? How could the free-rider problem be minimised in such a funding model?
  5. Discuss the possible interpretations of ‘equity’ when funding sea defences.
  6. If ‘flood defences could be built or maintained to protect those who do contribute while ignoring those who do not’, does this mean that such defences are not a public good?
  7. Find out how sea defences are funded in The Netherlands. Should such a funding model be adopted in the UK?
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The problem of getting people to pay to watch the show

Every summer a number of air shows take place in the UK, such as those at Farnborough, Cosford and the Royal International Air Tattoo. Some of these events prove to be extremely popular and successful. For example, over 50,000 people attended the event at Cosford on Sunday 9th June to watch a five-and-a-half-hour flying display, including the Red Arrows, a Vulcan bomber and a RAF Battle of Britain Memorial Flight, which featured Spitfire, Hurricane and Lancaster aircrafts.

The event was so popular that some people who had paid £25 for a ticket failed to make it to the show ground because they were stuck in a 9 mile traffic jam! The popularity of these events does raise an interesting economic question. Why do so many people pay to attend when it is possible to watch much of the air show from outside the showground? If people can enjoy the benefits of watching an event whether or not they have paid then we might expect the majority of them not to pay.

Air shows seem to have some of the characteristics of a public good: i.e. to some extent the consumption benefits are both non-rival and non-excludable. By non-rival it is meant that one person’s use or consumption of the good does not decrease the quantity available for somebody else to use or consume. If one person watches the Red Arrows fly by, it does not decrease the ability of others to watch them. Contrast this with a product that has the characteristic of being ‘rival’ such as a hamburger. If someone eats a hamburger, it reduces the amount that is available for others to enjoy. The good is ‘used up’ during consumption. Other people cannot eat the same hamburger!!! Many sporting and music events share this characteristic of non-rivalry. For example if somebody is watching a band playing live at Glastonbury it does not stop somebody else from enjoying the benefits of watching the band. The performance of the band is not ‘used up’ like the hamburger when a person watches the show.

The major difference between Glastonbury and an air show is that the event organisers at Glastonbury can prevent people who have not paid for a ticket from enjoying the show. The event is excludable, as fans have to enter the show arena in order to see the bands. However, as one contributor to an internet discussion site commented:

Air show organisers are at a particular disadvantage compared to other show organisers because the key elements of their show can be seen for miles.

Another contributor added that:

Unfortunately being an air show by its very nature it’s very public – the planes are in the air for everyone to see for free for miles around.

In other words, air shows have the characteristic of being non-excludable, as people can benefit regardless of whether they have paid or not.

These public good properties seem to be causing problems for an air show in Welshpool that appears to have an issue with a number of non-payers watching the event. The organisers recently stated that:

We can’t stop people watching from the hillsides, but perhaps we can make them understand that they need to come to the show and pay.

The previous year the organisers had sent people out with buckets to collect voluntary donations from those sitting on the hillside. However they found that:

People were not for giving much at all and it was noticeable how much copper was in the buckets we’d used and there were hardly any notes.

One solution being proposed in order to generate more revenue is to increase the entry fee, which is currently £5, in order to compensate for those who are not paying.

Articles
Bob Jones Memorial Air Show urges people to buy tick BBC News (9/6/13)
How to make an airshow pay PistonHeads, (9/6/13)
Free or should you pay Talk Photography, (9/6/13)
An organisers view Airshow, (9/6/13)
Cosford Air Show pledge over traffic chaos Shropshire Star, (10/6/13)
RAF Cosford Air Show – Home RAF Cosford Air Show, (12/6/13).

Questions

  1. What practical problems does a show such as Glastonbury face in trying to make the event excludable?
  2. In the blog it explains how one person watching a band live does not have a negative impact on the pleasure other people will derive from watching the same band: i.e. it is non-rival. Is this always true? Can you think of any circumstances when watching a live band might become a rival good?
  3. What term do economists use for goods that are non-rival but are excludable? Think of at least three examples.
  4. What ideas might the organisers of an air show adopt to encourage people to pay and enter the show ground area?
  5. Can you think of any strategies that might be used to increase the number and size of the voluntary donations made by those who watch the airshow for free from a hill-side?
  6. What are the organisers assuming about the price elasticity of demand for the air show at its current price if they claim that increasing prices will lead to an increase in revenue?
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Genuine progress on tackling climate change, or just hot air?

Ministers from around the world met in Durban in the first two weeks of December 2011 to hammer out a deal on tackling climate change. The aim was that this would replace the Kyoto Treaty, due to expire at the end of 2012.

International climate change agreements are particularly difficult to achieve, as there are several market failures involved. Also, there is considerable ‘gaming’, as each country seeks to negotiate a deal that benefits the world as a whole but which minimises the disadvantages to their own particular country.

The conference ended on the 11 December with a last-minute deal. Both developed and developing countries would for the first time work on a legally binding agreement to limit emissions. This would be drawn up by 2015 and to come into force after 2020. The following articles assess the significance of the agreement and whether it represents real progress or little more than a deal to work on a deal.

Articles
‘Modest’ gains as UN climate deal struck Independent (11/12/11)
Landmark deal saves climate talks Irish Examiner (11/12/11)
Durban climate change: the agreement explained The Telegraph, Louise Gray (11/12/11)
Durban climate conference agrees deal to do a deal – now comes the hard part Guardian, Fiona Harvey and Damian Carrington (13/12/11)
Climate deal: A guarantee our children will be worse off than us Guardian, Damian Carrington (11/12/11)
Durban climate deal: the verdict Guardian, Damian Carrington (12/12/11)
Australia hails Cop 17 agreement News 24 Australia (11/12/11)
Climate talks reach new global accord Financial Times, Andrew England and Pilita Clark (11/12/11)
Durban Climate Talks Produce Imperfect Deals Voice of America, Gabe Joselow (11/12/11)
Critics slam climate agreement t Sydney Morning Herald, Arthur Max (11/12/11)
Deal at last at UN climate change talks Euronews on YouTube (11/12/11)
World still in arrears on climate change pledges Reuters Africa, Barbara Lewis (11/12/11)
New UN climate deal struck, critics say gains modest Hindustan Times (11/12/11)
Climate change: ambition gap Guardian (12/12/11)
Canada leaves Kyoto to avoid heavy penalties Financial Times, Bernard Simon (13/12/11)
Durban Platform Leaves World Sleepwalking Towards Four Degrees Warming Middle East North Africa Financial Network, Ben Grossman-Cohen and Georgette Thomas (Oxfam) (13/12/11)
A deal in Durban The Economist (11/12/11)
Assessing the Climate Talks — Did Durban Succeed? Harvard University – Belfer Center for Science and International Affairs – An Economic View of the Environment, Robert Stavins (12/12/11)

Questions

  1. What was agreed at the Durban Climate Change Conference?
  2. Why is it difficult to get agreement on measures to tackle climate change? How is game theory relevant to explaining the difficulties in reaching an agreement?
  3. How would you set about establishing the ‘optimal’ amount of emissions reductions?
  4. Why will the market fail to provide the optimal amount of emissions reductions?
  5. Why was it felt not possible for a legally binding international agreement to come into force before 2020?
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The Nobel Prize

Elinor Ostrom and Oliver Williamson shared the 2009 Nobel Prize for Economics (and a prize of $1.4m) on Monday for their work on how economic transactions operate outside markets in common spaces and within companies. Their work includes topics such as the free-rider problem and how this can lead to a sub-optimal over-consumption of a resource. Their work also considers economic governance and how this has led to the increasing popularity of outsourcing for companies.

Despite the prestige of a Nobel Prize, there have been suggestions that a Nobel Prize in Economics should not have been awarded this year, given the inability of economists to predict the financial crisis and mixed opinions about how to prevent another one in the future. What do you think?

US duo wins Nobel for economics Financial Times, Chris Giles (12/10/09)
Two Americans win Nobel economics prize MSNBC, Associated Press (14/10/09)
What this year’s Nobel Prize in Economics says about the Nobel Prize in Economics The New York Times, Steven Levitt (12/10/09)
Humbling year for bickering economists Financial Times, Alan Beattie (11/10/09)

Questions

  1. What is market failure and how does the free-rider problem fit in?
  2. Do you think economists were at fault for not foreseeing the financial crisis?
  3. Do you think that the research of Elinor Ostrom and Oliver Williamson was deserving of the Nobel Prize and how important is their research in the context of economic theory?
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