Types of Goods
Expert reviewed • 14 August 2024 • 6 minute read
Understanding the different types of goods is highly important, particularly when discussing environmental sustainability. Goods can be classified based on their excludability and rivalry in consumption.
- Excludability refers to whether access to a good can be restricted to those who pay for it.
- Rivalry describes whether one person's use of a good reduces its availability to others.
What are Public Goods?
Public goods are non-excludable and non-rivalrous. This means that no one can be excluded from using them, and one person's use does not reduce the availability for others. Examples of this include:
- Clean air
- National defence
- Street lighting
- Lighthouses
What are Private Goods?
Private goods are both excludable and rivalrous. In environmental contexts, many resources and products fall into this category. This means that individuals can be excluded from using them, and one person's use reduces the availability for others.
For example, a sandwich is a private good. If one person eats it, it is no longer available for others to consume. Another example is personal electronics, such as smartphones, which are private goods. When one person uses a smartphone, it cannot be used by someone else simultaneously.
What is the Relationship Between Private Goods and Market Efficiency?
Private goods are efficiently allocated through market mechanisms, where prices reflect supply and demand. However, this system does not always address the environmental impacts associated with the production and consumption of private goods. For example, the production of private goods like cars can lead to negative externalities such as air pollution. Regulations and taxes are often used to internalise these externalities and reduce their environmental impact.
What is the Free Riders Theorem?
Free riders are individuals or entities that benefit from a public good or resource without paying for it or contributing to its provision or maintenance. This problem is particularly relevant for public goods. Because people cannot be excluded from using the good, they have no incentive to pay for it. Additionally, the good is under-provided because not enough people are willing to pay for it voluntarily.
Examples of the free riders theorem are:
- Street lighting is a public good. Residents benefit from it even if they do not contribute to its cost, leading to potential underfunding and insufficient provision.
- National parks can suffer from the free rider problem. People enjoy the benefits of conservation without directly contributing to the funding needed to maintain these areas.
Addressing the Free Rider Problem
To address the free rider problem, governments can implement policies such as taxation, subsidies, and regulation to ensure adequate provision of public goods. For example, governments fund public goods like street lighting and national defence through taxation, ensuring everyone contributes to and benefits from these services.