These two characteristics are rivalry and excludability.10 In economics, a good is said to be rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is considered non-rival if, for any level of production, the cost of providing it to an additional individual is zero. If you buy a bottle of water and drink it, nobody else can drink it.
If you buy a computer, nobody else can buy the same computer. The bottle of water and computer are rival goods. However, if you create a beautiful flowerbed in front of your house and you have no fence, people on the street enjoy looking at your flowerbed. The beautiful flowerbed is non-rival as it does not matter how many people look at it, they are not “using it up”.
A good is called excludable if it is possible to prevent people who have not paid for it from having access to it. By comparison, a good is non-excludable if non-paying consumers cannot be prevented from accessing it. For example, you need a ticket to go into the cinema hence the cinema is excludable. Streets and street lighting are not excludable though because anybody walking down the street at night benefits from lighted streets. It is impossible to make users of lighted streets pay for walking on the street and ban those, who do not pay, to walk on lighted streets.
On the basis of the existence or non-existence of these two characteristics, the goods are divided into four types11:
- Private goods
- Public goods
- Club goods
- Common goods
Figure 2 shows the formation of these four groups of goods on the basis of rivalrous and excludability, together with examples. Most goods that people typically think about are both excludable and rival in consumption, in other words, the seller is able to prevent consumers from accessing the product. These goods are called private goods. Private goods are, for instance, mobile phones, clothes, cars, fridges, watches, consumer goods, and private services such as hairdressing and beauty services, etc. The distribution of private goods takes place on the market, as a result of supply and demand.
Club goods are excludable, which means that the consumer cannot use the product unless they directly pay for it. Club goods are non-rival, which means that the consumption by one person does not prevent others from consuming it. Club goods are, for example, Wi-Fi, Internet, satellite TV, private parks, private roads, etc (see Fig. 2). As a rule, club goods are available to club members and exclusion is based on the payment of a club membership fee.
Common goods are characterised by non-excludability and rivalry. Non-excludability means that it is practically impossible to prevent the consumption of these goods by those who have not paid for it. However, these goods are rivalrous – the more one person consumes, the less there is available to everyone else. For example, wild fishing is considered non-excludable as it is impossible to prevent others from fishing there and it is rivalrous as the more one person fishes from a wild lake, the fewer there are available to others (see Fig. 2).
Public goods are characterised by non-excludability and non-rivalrous. This means that once a benefit has been made available to one consumer, each additional consumer does not reduce the ability of others to benefit from it, and it is virtually impossible to exclude non-payers. National defence is one representative example of a public good as it is not possible to selectively protect paying customers from military attacks, and one person consuming national defence (i.e., being protected) does not make it more difficult for others to consume it too (see Fig 2).
The best-known public and/or common goods and services are, for example, air, the ozone layer, oceans, the greenhouse effect, as well as state and local governance, creation of the judicial area and justice, national defence, ensuring public order, ensuring the country’s international representation, and citizenship. Examples of goods and services that can be public, common or private goods are: roads and streets, traffic lights, museums, historic buildings, but also environmental protection, health services, education services, social protection network, culture, etc. However, it is possible to turn most goods and services classified as common goods into private or club goods.
In the next chapter, we will look at the problems associated with the supply and consumption of common and public goods.
10 Mnmeconomics (30.09.2020)
11 BoyceWire. Behavioural economics (30.09.2020)
