This chapter focuses on government support for the arts. We outline the economic theory of arts support and describe the external or collective benefits arising from the arts. We also describe the arts from the perspective of merit goods. Particularly, we explain whether public subsidies may make art and culture more accessible to the poor. Finally, we survey how units of government around the world support the arts through the theoretical lens developed in this chapter.

This chapter is meant to give an introduction to the economics of arts and culture. We provide a definition of economics and motivate the coverage of the book. This chapter explains when and why the arts and culture have become a subject of economic enquiry. We conclude by giving an overview of the size of the arts sector in the United States and Europe.

This chapter seeks to understand how media and digital technologies influence art demand and supply. Particularly, we shed light on the impact of the mass media on cultural consumption and live attendance. We describe the emergence of virtual museums and, more broadly, digital cultural heritage. We also evaluate whether video games may influence art consumption and discuss the cultural importance of video games. Finally, we cover the consumption of music and how it relates to the rapidly changing and evolving music industry.

This chapter focuses on the supply side of the cultural sector. Focusing on the process of production, we touch on how to measure output in the performing arts and present an appropriate set of cost concepts, including the important concept of opportunity cost. Throughout the chapter, we discuss the difficulties of measuring output and costs in the cultural sector.

Our discussion to this point has focused entirely on perfectly competitive markets, or scenarios in which the economy is populated by large numbers of producers and consumers who individually have no ability to influence market prices. However, in reality, we may sometimes encounter cases of imperfect competition, whereby the number of producers is so small that individual producers do indeed wield some sort of pricing power.

As we have seen in the Preface, in microeconomics we explain economic phenomena using “rational behavior,” the idea that all individuals behave in the most beneficial way possible for themselves, and then decide whether the consequences are good or bad based on each citizen’s interest. This is necessary (i) to understand the incentives that govern economic behavior and (ii) to be able to make policy that pays attention to every citizen’s well-being. In this chapter, we formally define each individual’s needs or interest (which we call an individual’s “preferences”) and rational behavior, which are the basis for such economic analysis.

Above we have learned about consumers and producers. What happens when they meet in the market? Let us start out by focusing on a single market under the assumption that other things (including other market prices and income levels) are equal. This sort of approach is known as partial equilibrium analysis. After acquiring a solid grasp of the basics, we then move on to “general equilibrium analysis” – simultaneous analysis of all markets – in Section 3.3.

In this chapter we will study a general method for analyzing social and economic problems that take place over time, which we call dynamic games. I’ll start by explaining a simple example that will illustrate various key concepts that we will use to solve dynamic games.

The above discussion has focused on the ways in which the market mechanism gets things right, or, more specifically, on the ability of perfectly competitive markets to allocate various resources (efficiently) in accordance with the needs of the people when all goes well. However, it is important to acknowledge that the market mechanism may also occasionally get things wrong. In this chapter we focus on so-called market failures, or typical cases in which the market mechanism fails to achieve an efficient allocation of resources – for whatever reason – and how they might be best addressed.

In modern society, everything – including food, housing, and music – is traded with a number called “price.” We usually don’t give this much thought, but isn’t it puzzling, if you stop to think about it? The objective of Part I is to understand the basic function of a market and its limitations. To this end, we first try to understand consumer behavior and firm behavior, and then analyze what happens if they interact in a market.