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LOAN LOSS RESERVES: A special account set aside by banks acting as a buffer between deposits and net worth that's used in case a loan is not repaid. Without this reserve, an unpaid loan on the asset side of a bank's balance sheet would require an adjustment of deposits or net worth on the liability side. The loan loss reserve is used for this adjustment.

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NONPAYER EXCLUDABILITY:

Whether or not nonpayers can be excluded from consuming a good. In other words, can those who do not pay for a good be excluded from consuming the good. Nonpayer excludability is based on the ability to possess and transfer property rights or ownership of a good. For some goods, nonpayers can be easily excluded from consumption because property rights are well-defined and easily controlled. For other goods nonpayers cannot be easily excluded from consumption because property rights are not well-defined and cannot be easily controlled. When combined with consumption rivalry, the result is four alternative types of goods -- private, public, common-property, and near-public.
Nonpayer excludability is a key characteristic that determines if those who do not pay for a good can be prevented from consuming the good. The key to nonpayer excludability is the ability to control the transfer of property rights. The two alternatives of nonpayer excludability are basic yes and not. Either nonpayers can be excluded or they cannot.

A related characteristic of goods is consumption rivalry, which is whether or not consumption of a particular good by one person prevents simultaneous consumption by another. These two characteristics give rise to four types of goods -- private (rival consumption and nonpayers can be excluded), public (nonrival consumption and nonpayers cannot be excluded), common-property (rival consumption and nonpayers cannot be excluded), and near-public (nonrival consumption and nonpayers can be excluded).

Nonpayer excludability determines whether or not goods can be exchanged through markets. If nonpayers can be excluded from consumption, then markets can be effectively used to exchange goods. If nonpayers cannot be excluded from consumption, then markets cannot be effectively used to exchange goods.

Exclude or Not

Nonpayer excludability has two possibilities -- excludable or nonexcludable.
  • Excludable: If goods have well-defined property rights, then nonpayers can be excluded from consuming a good. A candy bar provides an example of a good in which nonpayers can be easily excluded from consumption. If Roland Nottingham owns a candy bar, then he can prevent Victor Thurgood from eating, consuming, or enjoying this candy bar, if Roland does not offer payment.

  • Nonexcludable: If goods do not have well-defined property rights, then nonpayers cannot be excluded from consuming a good. A spectacular fireworks display provides an example of a good in which nonpayers cannot be easily excluded from consumption. Whether of not Roland Nottingham makes payment, he can watch this dazzling fireworks display lighting up the Shady Valley night sky from his front porch. The display is available for all Shady Valley residents to see, those who pay and those who don't.

Consumption Rivalry

Related to nonpayer excludability is the characteristic of consumption rivalry. This characteristic indicates whether the consumption of a particular good by one person prevents simultaneous consumption by another person. In other words, does consumption impose an opportunity cost on others. Rival consumption occurs if the consumption by one imposes an opportunity cost on others because others are prevented from consuming the good. Nonrival consumption occurs if the consumption by one does not impose an opportunity cost on others because others are not prevented from consuming the good.

Four Goods

Matching up consumption rivalry and nonpayer excludability in different combinations gives rise to four distinct types of goods. private, public, common-property, and near-public.

Let's take a look at each one.

  • Private: Private goods are characterized by rival consumption and the ability to exclude nonpayers. Such goods have well-defined property rights that can be transferred to others, but only if others pay to acquire ownership.

  • Public: Public goods are characterized by nonrival consumption and the inability to exclude nonpayers. These goods are, in essence, owned by everyone, which is actually okay because everyone can benefit from simultaneously consuming the goods.

  • Common-Property: Common-property goods are characterized by rival consumption and the inability to exclude nonpayers. These goods are owned by everyone, meaning they are not owned by anyone in particular. Even though consumption by one imposes an opportunity cost on others, one person cannot prevent another from consumption.

  • Near-Public: Near-public goods are characterized by nonrival consumption and the ability to exclude nonpayers. While nonpayers can be excluded from consumption, nonrival consumption means there is no efficiency reason to exclude nonpayers.

Market Exchanges

The nonpayer excludability characteristic of a good determines whether or not goods can be exchanged through markets. Market exchanges are only possible if goods have well-defined property rights that can be reassigned to another.

If nonpayers can be easily excluded from consumption, then property rights are well-defined and goods can be exchanged through markets. If nonpayers cannot be excluded from consumption, then property rights are not well-defined and goods cannot be exchanged through markets. In other words, markets can be used to allocated goods if those who do not pay can be excluded from gaining ownership and control. However, markets do not work, they fail, if those who do not pay cannot be excluded from gaining ownership and control.

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Recommended Citation:

NONPAYER EXCLUDABILITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: July 22, 2018].


Check Out These Related Terms...

     | consumption rivalry | good types | private goods | public goods | common-property goods | near-public goods | free-rider problem | public finance |


Or For A Little Background...

     | good | production | efficiency | consumption | market demand | market | market efficiency | public sector | private sector | property rights | ownership and control |


And For Further Study...

     | market failures | public goods: demand | public goods: efficiency | taxation principles | tax proportionality | tax effects | tax equity | involuntary exchange | benefit principle | ability-to-pay principle | public choice |


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