Exclusion Principle

Discussion

Mike Chege:

"The market mechanism is based on exchange and exchange can occur only where there is an exclusive right of ownership to the property which is to be exchanged. In fact, the market system may be viewed as a system for the exchange of property rights.

To put it another way, the market can function only in a situation where the “exclusion principle” applies, i.e., where A’s consumption is made contingent on A’s paying the price, while B, who does not pay is excluded. Exchange cannot occur without property rights, and property rights require exclusion. The market therefore tends to cater to those particular consumer demands that are amenable to the exclusion principle. This bias means that in situations where exclusion would be impossible or prohibitively expensive no goods or services will be provided by the market mechanism, even if the provision of such goods or services is socially desirable, and a situation known as “market failure” occurs.

A classic example of market failure is national defence. Since it is impossible to provide the benefits of national defence to those of the country’s inhabitants who are prepared to pay while excluding the benefits from those who are not prepared to pay, each individual will find it in his or her interest to consume without paying, or to “free–ride.” Without the ability to exclude free riders, the incentive to provide national defense through the market thus disappears and it is for this reason that certain services, such as national defence, must be provided by the government." (http://firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/fm/article/view/2186/2062)