the marginal benefit from additional membership is equal to the marginal congestion costs. Because of the three conditions, there is usually a two-part pricing of club goods. One is the fixed up-front membership fees and the other is the per unit charge to achieve an optimal utilisation. In the case of a pure public good, like political lobbying a two-part pricing is not feasible, but a club can provide selective incentives, also called Member-only privileges, like subscribing to the club's magazine or journal. Since clubs compete for members, as long as clubs can be closed freely and members are free to exit, prices for clubs will be in line with costs. The free exit option prevents clubs from charging prices that are too high, but incentivizes free-riding. Members understate their benefits, reduce their effort they supply towards achieving the club's collective goals and take advantage of other club members. The theory of clubs has been intensively applied to the realm of international alliances. Olson and Zeckhauser (1967) published a cost-sharing analysis of the North Atlantic Treaty Organisation (NATO). In particular they identify the conditions under which it would be in the interest of the club members to increase the size of NATO. According to them every members pay contribution fees, based on their specific marginal values. Therefore, costs shares are computed based on the club's total costs and group size. They point out that the United States is by far the largest contributor to NATO and by that to the collective goal of the institution. The question raised is whether the differences in membership contribution are reasonable given each country's valuation of the provided good by the alliance. Otherwise, the distribution of cost shares is unjust and several member states are free riding. See also Benefit principle Collaborative consumption Exit (economics) Yield management Public choice Public finance Tax choice The Logic of Collective Action Voluntarism (action) Fair division among groups – a variant of fair division in which the pieces of a resource are given to pre-determined groups and become club goods in these groups. Notes References Cornes, Richard and Sandler, Todd, [1986] 1996. The Theory of Externalities, Public Goods, and Club Goods, 2nd ed. Cambridge University Press. Description and chapter-preview links. Marciano, Alain, 2011. "Buchanan on Externalities: An Exercise in Applied Subjectivism," Journal of Economic Behavior & Organization, 80(2), pp. 280–289. Abstract. _. - Why markets do not fail.