Optimal and Equilibrium Membership in Clubs in the Presence of Spillovers

Abstract

This paper treats a partial equilibrium club economy in which clubs impose positive or negative externalities on one another. Both spillovers in congestable good and crowding are studied. It is shown that an increase the relative strength of the first type of spillover may result in either an increase or decrease in the optimal club size and public good levels. Spillovers in crowding, on the other hand, have a definite effect on the optimal membership and production of public good. These optimal outcomes are then compared to Nash equilibrium club size and public good provision when clubs are established by profit maximizing entrepreneurs instead of a social planner.