How to Market the Public Goods with Both Negative and Positive Externalities
- Post by: Junyi Li
- August 6, 2021
- No Comment
Public good & externalities
The externality is an important concern in the economics of public goods. Externality often occurs when the economic equilibrium between production and consumption, reflected as a private price, can not reflect the actual cost/benefit of such products or services. For example, environmental pollution is a good example of a negative externality. Since the expense of dealing with pollution will be bear by the government/the public, enterprises will not take the potential environmental pollution cost into account and spontaneously choose a manufacturing process that might pollute the environment but costs less. Therefore, it is necessary to impose an additional tax on the enterprises producing pollution.
On the contrary, educational investment is a good example of a positive externality. A sound education leads to not only a promising personal career but also a harmonious society. However, individuals tend to focus on their own interests, so they are less likely to invest in the education for next-generation. In other words, people don’t have strong incentives to invest in a harmonious society, at least less than our expectations. Therefore, the government must bear part of the education expense. In short, negative externality tends to hide part of the production cost, while positive externality tends to hide part of the production benefit.
Context: Crowdfunding for medical treatment
Although the externality has been studied for many years, few studies (Amir,2020) have identified a product/serve with both positive and negative externality. Thus, I want to introduce a new context of such a special public good, crowdfunding for medical treatment. Due to significant growth in the private investment markets, crowdfunding platform provides a new channel for the enterprises, especially for the start-ups, to access the potential investors. Usually, these investors will gain some financial reward or products/services after project success. However, in the context of crowdfunding for medical treatment, donors will gain nothing but the happiness of helping others. Therefore, crowdfunding for medical treatment is a kind of public goods.
We take spreading crowdfunding requests on social media as a marketing activity. The externalities of crowding for medical treatment are presented next.
Positive externalities: Individual crowdfunding request needs to be spread through social media, which increases the exposure of crowdfunding platforms and subsequently the public investment in healthcare crowdfunding. The reason is that the increased exposure to these tragic stories tends to inspire the public to act altruistically, leading to an increase in the number of donors. Thus, the positive externality refers to the idea that social information can significantly increase individual contributions (Rachel,2007).
Negative externalities: We assume a limited amount of money the public can spend on altruism. Each crowdfunding request will crowd out the possibility of other individuals getting funding. Similar phenomenons are documented in the economics literature.
Thus, there are two potential research questions from the empirical perspective.
- Whether the rich and the poor receive the same level of benefits from crowdfunding? For example, more impoverished families naturally have a higher demand for financial support when facing the unexpected. However, these families have fewer social ties than the rich ones, leading to a lower competitive advantage in the crowdfunding process. As a result, crowdfunding for medical treatment may not benefit low-income families but cannibalize traditional aid channels. In the traditional channel, funds are collected from donors and distributed through centralized evaluation. Crowdfunding, however, is distributed according to the wishes of each donor. Thus, we need a trade-off between efficiency and fairness. A centralized distribution scheme (i.e., charity) is fairer but requires more time and administrative costs, while a decentralized distribution scheme (i.e., crowdfunding) has lower costs but lacks fairness.
- How does the marginal effect change with the spread of crowdfunding requests in social media? (e.g, close friends->general friends->strangers->strangers) The marginal effect refers to the amount of increased funding for each additional diffusion unit.
Solution: how to design the marketing strategies?
Finding effective fundraising mechanisms for the private provision of public goods is an important policy issue. I came up with a controversial solution that the lottery schemes (John, 2000) might improve the efficiency of the whole public goods market. To be more specific, a certain percentage of the fundraising will be collected as a bonus pool to reward the lucky donators. The donators will receive some lotteries numbers according to their donation. Gradually, there will exist a surplus in the bonus pool, which will be transferred to those fundraising requests that do not get enough attention and donation.
Lottery schemes have been implemented in many countries to improve the financing of public goods. The primary mechanism why the lottery works is that lotteries reward giving (Corazzini, 2010). The primary mechanism why crowdfunding works is that crowdfunding reduces the financing cost via an informative approach. Therefore, traditional lottery patterns lack information reinforcement (e.g., spreading in the social networks) due to the concern about gambling from the government. At the same time, crowdfunding for medical treatment is unrewarding and thus lacks incentives. Taken together, crowdfunding for medical treatment can eliminate the concerns about the adverse impact on society. Suppose we adopt the lottery scheme in crowdfunding for medical treatment. In that case, the reward mechanism of lotteries can motivate the public contribution. In contrast, the shift mechanism (i.e., compensation for the requests with lower attention) can reduce the suffering from social or technological disadvantage (e.g., digital divide). In some sense, we can take advantage of the positive externality to improve the public contribution and relieve the negative externality using re-distribution.
Although lotteries are getting more and more attention in emerging papers on corporate crowdfunding (Du, 2019; Gong, 2020), such a framework might not work in the public goods market since scholars also argue that financial incentives tend to inhibit altruistic behavior (Dandan, 2020). Whether the lottery scheme will work in such a context remains a question.
References
Phirouzabadi, A. M., Blackmore, K., Savage, D., & Juniper, J. (2020). On the coexistence of positive and negative externalities in the inter-powertrain relationships. Journal of Cleaner Production, 277, 124118.
Shang, J., & Croson, R. (2009). A field experiment in charitable contribution: The impact of social information on the voluntary provision of public goods. The economic journal, 119(540), 1422-1439.
Corazzini, L., Faravelli, M., & Stanca, L. (2010). A prize to give for: An experiment on public good funding mechanisms. The Economic Journal, 120(547), 944-967.
Du, Z., Wang, K., & Li, M. (2019). Promoting crowdfunding with the lottery: The impact on campaign performance. Information & Management, 56(8), 103159.
Gong, J., Pavlou, P. A., & Zheng, Z. (2020). On the use of probabilistic uncertain rewards on crowdfunding platforms: The case of the lottery. Information Systems Research, 32(1), 115-129.
Qiao, D., Lee, S. Y., Whinston, A. B., & Wei, Q. (2020). Financial Incentives Dampen Altruism in Online Prosocial Contributions: A Study of Online Reviews. Information Systems Research, 31(4), 1361-1375.
Illustration copyright: Matt Chase