Characteristics of Goods

  • Rival (in consumption)

    • good that cannot be consumed by more than one person at a time

    • ie. hamburger

  • Nonrival (in consumption)

    • good that can be consumed jointly by groups of people

    • ie. lecture

  • Excludable

    • suppliers can prevent non-payers from consuming the good

  • Nonexcludable

    • suppliers cannot prevent those who did not pay for an item from enjoying the benefits of the good

Four Types of Goods

Excludable Non- excludable Rival in consumption Private goods Wheat • Bathroom fixtures Common resources • Clean water • Biodiversity Nonrival in consumption Artificially scarce goods • On-demand movies • Computer software Public goods • Public sanitation • National defense

Private Goods

  • Rival and excludable

  • Excludability is crucial because if a supplier could not discriminate who gets their particular item or not, he or she would have no incentive to produce

  • There would exist a free-rider problem in which no rational consumer would choose to pay for a good or service if provided (or nonexcludable)

  • If items are nonrival, then an inefficiently low quantity of items are consumed

  • Most items (cars, food, phones, pencils, jeans, stapler, markers, etc) are private goods in which the market functions properly

Public Goods

  • Nonrival and nonexcludable

  • Suffer from the free-rider problem because private firms generally produce inefficiently low quantities

  • Public radio, for example, or scientific research sometimes rely on private donations

  • In the UK, a license fee (~$230 in 2010) is charged to television owners but is made excludable by using "television detection vans"

  • Most people agree that the government should provide national defense, the legal system, fire protection, etc.

Common Resources

  • Rival and nonexcludable

  • Since you can't stop me from consuming the good and more by me means less of the good for you, there's an incentive to overuse

  • Tragedy of the commons -- depletion of a shared resource by individuals acting rationally according to each one's self interest, though contrary to the group's long-term best interest -- Negative externality

  • Example: Fish in river

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Artificially Scare Resources

  • Nonrival and excludable

  • Marginal cost to society watching pay-per-view is zero

  • Yet cable companies prevent those who haven't paid from watching

  • Computer software and audio files share this same characteristic

  • This is allocatively inefficient since the P is greater than the MC, but producers will have no incentive to produce a product unless profit is generated

Healthcare and Government

  • Should the government get involved in healthcare?

  • This is a normative question, but it is useful for both proponents and opponents of nationalized healthcare to consider the following two questions

    • Is it rival or nonrival?

      • Rival

    • Is it excludable or nonexcludable?

      • Nonexcludable

    • So healthcare is common resource

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