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What makes a cream-filled doughnut different from a public park? What do the two goods have in common? From an economist's perspective, these two goods differ based on how they exhibit the attributes of rivalry and excludability.
Rivalry in consumption means that if one person consumes a good, it is no longer available for consumption or use by any other individual. When you buy and eat a cream-filled doughnut from the local bakery, no one else can purchase or consume that same cream-filled doughnut. You have consumed it, and it is gone. Your consumption of the doughnut prevents anyone else from enjoying it, so it has the characteristic of rivalry. The public park is different. When you take your dog for a run at the park, other people can also take their dogs to the park. You can enjoy the same park at the same time as other people, so a public park is characterized as being non-rivalrous, which is the opposite of rivalrous. The use of the park by one individual does not reduce the availability of the park to other individuals.
The cream-filled doughnut and public park exhibit another characteristic of goods, excludability. When a good is excludable it is accessible to all individuals, but requires payment or the granting of special access to enjoy its benefits. You can be excluded from enjoying the cream-filled doughnut, because you have to pay the local bakery for your doughnut(s). If you do not pay for it, you can be excluded from the benefits of the good.
On the other hand, if you take your dog to the public park for a run, you do not have to pay or be granted special access to walk in the park. No one can exclude you from enjoying the public park. Therefore, it does not have excludability characteristics. It is characterized as being non-excludable, which is the opposite of excludable.
EXAMPLE
The air we breathe is non-excludable. Everyone breathes air. You don’t have to pay to breathe air. No one can be excluded from breathing air.Now that we have explored the concepts of rivalry and excludability, we can use these concepts to classify economic goods into four categories: public, private, club, and common. Understanding the type of economic good will help explain why intervention in some markets by the government is more likely than in other markets.
The table below summarizes the attributes of the four types of economic goods.
| Excludable | Non-Excludable | |
|---|---|---|
| Rivalrous | Private Goods | Common Goods |
| Non-Rivalrous | Club Goods | Public Goods |
The goods and services that we purchase and consume for private use such as food, clothing, and electronic devices represent one type of good. Private goods can be limited and are exclusive, which also makes them rivalrous. They include the cream-filled doughnut we discussed earlier.
EXAMPLE
That football you bought from the sporting store to toss around the backyard with your child is a private good. It exhibits both the characteristics of rivalry and excludability. Once you took it off the shelf and paid for it, you began to enjoy its benefits. No one else can buy that same football. While there are likely similar footballs available for sale, the one you purchased and carried home is no longer available to others, which makes it rivalrous. And because you also had to pay at the store, the football is excludable.Some goods are meant for public use, including street lighting, lighthouses, and public roadways. Public goods are the exact opposite of private goods. Public goods are considered to be both non-rivalrous and non-excludable.
Other classic examples of public goods include the national defense system, public waterways, radio signals, and television transmitted via free publicly accessible airwaves. You enjoy the benefits of the national defense system at the same time as millions of other people. The good is non-rivalrous. Whether or not you pay taxes, you cannot be excluded from enjoying the benefits of our national defense system. The good is non-excludable.
Because individuals cannot be excluded from a public good and do not have to pay to enjoy the benefits of a public good, individuals will often attempt to conceal their true demand for public goods.
EXAMPLE
The street lighting in your neighborhood is a public good. Anyone walking or driving along your street can enjoy the lighting whether they pay local taxes or not. This makes street lighting non-excludable. You and your neighbor can stand on the street corner chatting together and simultaneously enjoy the lighting. Street lighting is non-rivalrous.When individuals make decisions about paying for a public good, a problem can arise. Some people will have an incentive to let others pay for public goods, and get a “free ride” on public good purchases made by others. This problem is known as a free rider problem. When the true demand for a good cannot be determined, setting a price is made more difficult. The market operates less efficiently and resources are misallocated, causing an underproduction of public goods.
Governments provide public goods and services because private companies find it difficult to produce public goods. Without the ability to determine a price, firms find it difficult to earn a profit. Additionally, individuals are often less willing to pay for goods from which non-payers cannot be excluded. Price is a statement about the value of a good or service. The more highly valued an item, the more individuals are willing to pay. If all the relevant information about the value of a product is not captured in the price, then the price is flawed. A flawed price is often the source of market failure with public goods. Price does not fully reflect the true value of the product to all those who benefit from it.
Community-wide wifi and local government services such as local fire and police protection services represent a type of economic good. These goods are shared goods, or common goods, available to all members of a community. A common good is neither completely private nor completely public. Like a private good, common goods are rivalrous, but like a public good, common goods are non-excludable.
Therefore, a common good is one that lies between a private and public good. We call it a common good because it is shared in common with many others, which makes it rivalrous, but we cannot exclude people from enjoying it even when they do not pay.
EXAMPLE
Individuals can fish in international waters without restriction, therefore, this good is non-excludable. However, individuals compete to catch the fish in international waters. A fish caught by one fisher is not available to another fisher, making the good rivalrous. Because no one owns the fish in international waters, it is possible for individuals to overfish and deplete the stock of fish.Because common goods have this characteristic of non-exclusion, people tend to overuse, or over-consume common goods, thereby decreasing the opportunity of another individual from consuming a proportionate share. This is a well-known problem of common goods, known as the tragedy of the commons. This situation occurs with common goods when an individual ignores the well-being of society in the pursuit of their own interests.
The final category of goods includes private parks, theater performances, internet services, and similar goods. These economic goods are known as club goods. Club goods are those that are excludable and non-rivalrous. Club goods are neither completely private or public, in that they are non-rivalrous, like public goods, but also excludable, like private goods. Owners of club goods have a legal right to prosecute individuals who attempt to consume their product without paying for it.
EXAMPLE
Suppose you want to attend the showing of a new blockbuster movie at the local theater featuring your favorite actor. To attend the movie you will have to purchase a ticket for entrance. Movie attendance is excludable. However, once you are seated in the theater, others watch the same movie that you are watching, making it non-rivalrous.Having learned the characteristics of economic goods, you should be able to discern that markets involving public goods and common goods perform less efficiently than those involving private goods and club goods. In the cases of public goods and common goods, government intervention is used to improve the outcomes in these markets.
Private businesses don’t provide public goods, because private businesses are motivated by making a profit and are not able to earn a profit producing public goods. The provision of public goods by private businesses is problematic, because the true demand for these good(s) is unknown, and a price cannot be determined. When some individuals value the good but don’t wish to pay for it, demand is not accurately represented, and pricing is made more difficult. Public goods are also non-excludable. Those who do not pay cannot be prevented from enjoying the benefits of the public good. The market will underproduce public goods. To improve market outcomes the government intervenes, and provides these public goods and services using taxpayer dollars.
When it comes to common goods, government intervention is often necessary. The provision of common goods is problematic, because common goods are shared by many but owned by no one individual. As a result, common goods are overused, often to the point of destruction. Solving the problem of overuse of common resources, typically, involves government regulation. For the protection of wildlife and fish stocks, devices like hunting and fishing licenses, harvest limits, and shorter hunting and fishing seasons are instituted. Other common goods are similarly protected through a system of rules of use and regulation of individual behavior.
| Excludable | Non-Excludable | |
|---|---|---|
| Rivalrous |
Private Goods
|
Common Goods
|
| Non-Rivalrous |
Club Goods
|
Public Goods
|
Source: THIS TUTORIAL HAS BEEN ADAPTED FROM OPENSTAX “PRINCIPLES OF ECONOMICS 2E”. ACCESS FOR FREE AT https://openstax.org/books/principles-economics-2e/pages/1-introduction. LICENSE: CC ATTRIBUTION 4.0 INTERNATIONAL.
