How well do markets work in providing the goods that people want? The answer to this question depends on the good being considered . As we discussed a market can provide the efficient number of ice cream cones. The price of ice cream cones adjusts to balance supply and demand and this equilibrium maximizes the sum of producer and consumer surplus. Yet as we discussed the market cannot be countered on to prevent aluminum manufacturers from polluting the air we breathe: Buyers and sellers in a market work well, when the good is ice cream but they work badly when the good is clean air.
In thinking about the various goods in the economy it is useful to group them according two characteristics :
Excludability: The property of a good whereby a person can be prevented from using it.
Rivalry in consumption: The property of a good whereby one person’s use diminishes other people’s use.
1) Is the good excludable? Can people be prevented from using the good?
2) Is the good rival in consumption? Does one person’s use of the good reduce another person’s ability to use it?
Using these two characteristics, Figure divides goods in to four categories :
Private goods are both excludable and rival in consumption. Consider an ice cream cone. for example An ice cream cone is excludable because it is possible to prevent someone from eating an ice cream cone – you just don’t give it to him . An ice cream cone is rival in consumption because if one person eats an ice cream cone, another person cannot eat the same cone. Most goods in the economy are private goods lie ice creams cones: You don’t get one unless you pay and, once you get it you are the only person who benefits.
Public goods are neither excludable nor rival in consumption . The people cannot be prevented from using a public good, and one person’s use of a public good does not reduce another person’s ability to use it. For example a tornado siren in a small town is a public good, Once the siren sounds, it is impossible to prevent any single person from hearing it (so it is not excludable). Moreover, when one person gets the benefit of the warning he does not reduce the benefits to anyone else ( so it is not rival in consumption).
Common resources: goods that are rival in consumption but not excludable.
Common resources are rival in consumption but not excludable. For example fish in the ocean are rival in consumption when one person catches fish there are fewer fish for the next person to catch. Yet these fish are not an excludable good because given the vast size of an ocean, it is difficult to stop fishermen from taking fish out of it.
When good is excludable but not rival in consumption it is an example of a good produced by a natural monopoly. For instance consider fire protection in a small town. It is easy to exclude someone from using this good . The fire department can just let his house burn down, yet fire protection is not rival in consumption. Once a town has paid for the fire department the additional cost of protecting one more house is small.
Figure below offers a clean separation of goods into four categories.
Four types of Goods:
Goods can be grouped into four categories according to two questions: (1) Is the good excludable? That is, will people be prevented from using it? (2) Is the good rival in consumption? That is does one person’s use of the good diminish other people’s use for it? This diagram below gives examples of good in each of four categories .
Rivals in consumption:
Private goods: YES
1) Ice cream cones
3) Congested toll roads.
Common Resources: NO
1) Fish in the ocean
2) The environment
3) Congested non toll roads
Natural Monopolies: NO
1) Fire protection
2) Cable TV
3) Un congested toll roads
Public Goods: NO
1) Tornado siren
2) National defense
3) Un congested non toll roads.
Source: Principles of Economics