Private Goods, Public Goods, Congestible Goods and Club Goods

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Types of Goods and Not Well-Defined Property Rights

When economists describe a market using the supply and demand model, they often assume that the property rights for the good in question are well-defined and the good is not free to produce (or at least to provide to one more customer).

It’s quite important, however, to consider what happens when these assumptions are not satisfied. In order to do this, 2 product characteristics need to be examined: excludability and rivalry in consumption. 

If property rights are not well-defined, there are 4 different types of goods that can exist: private goods, public goods, congestible goods and club goods.

Let's go over each of these economic terms.

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Excludability

Excludability refers to the degree to which consumption of a good or service is limited to paying customers. For example, broadcast television exhibits low excludability or is non-excludable because people can access it without paying a fee. On the other hand, cable television exhibits high excludability or is excludable because people have to pay to consume the service.

It's worth noting that, in some cases, goods are non-excludable by their very nature. For instance, how would one make the services of a lighthouse excludable? But in other cases goods are non-excludable by choice or design. A producer can choose to make a good non-excludable by setting a price of zero.

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Rivalry in Consumption

Rivalry in consumption refers to the degree to which one person consuming a particular unit of a good or service precludes others from consuming that same unit of a good or service. For example, an orange has high rivalry in consumption because if one person is consuming an orange, another person cannot completely consume that same orange. Of course, they can share the orange, but both people can't consume the entire orange.

A park, on the other hand, has low rivalry in consumption because one person "consuming" (i.e. enjoying) the entire park doesn't really infringe on another person's ability to consume that same park.

From the producer's perspective, low rivalry in consumption implies that the marginal cost of serving one more customer is virtually zero.

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4 Different Types of Goods

These differences in behavior have important economic implications, so it's worth categorizing and naming types of goods along these dimensions. The 4 different types of goods are private goods, public goods, congestible goods and club goods.

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Private Goods

Most goods that people typically think about are both excludable and rival in consumption, and they are called private goods. These are goods that behave "normally" in terms of supply and demand.

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Public Goods

Public goods are goods that are neither excludable nor rival in consumption. National defense is a good example of a public good; it is not really possible to selectively protect paying customers from terrorists and whatnot, and one person consuming national defense (i.e. being protected) doesn't make it more difficult for others to also consume it.

A notable feature of public goods is that free markets produce less of them then is socially desirable. This is because public goods suffer from what economists call the free-rider problem: why would anyone pay for something if access is not restricted to paying customers? In reality, people do sometimes voluntarily contribute to public goods, but generally not enough to provide the socially optimal quantity.

Furthermore, if the marginal cost of serving one more customer is essentially zero, it is socially optimal to offer the product at a zero price. Unfortunately, this doesn't make for a very good business model, so private markets don't have very much of an incentive to provide public goods.

The free-rider problem is why public goods are often provided by the government. On the other hand, the fact that a good happens to be provided by the government doesn't necessarily mean that it has the economic characteristics of a public good. While the government doesn't have the ability to make a good excludable in a literal sense, it can fund public goods by levying taxes on those who benefit from the good and then offer the goods at a zero price.

The government's decision regarding whether to fund a public good is then based on whether the benefits to society from consuming the good outweigh the costs of taxation to society (including the deadweight loss caused by the tax).

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Common Resources

Common resources (sometimes called common-pool resources) are like public goods in that they are not excludable and thus are subject to the free-rider problem. Unlike public goods, however, common resources exhibit rivalry in consumption. This gives rise to a problem called the tragedy of the commons.

Since a non-excludable good has a zero price, an individual will keep consuming more of the good as long as it provides any positive marginal benefit to him or her. The tragedy of the commons arises because that individual, by consuming a good with high rivalry in consumption, is imposing a cost on the overall system but not taking that into account her decision-making processes.

The result is a situation where more of the good is consumed than is socially optimal. Given this explanation, it's probably not surprising that the term "tragedy of the commons" refers to a situation where people used to let their cows graze too much on public land.

Luckily, the tragedy of the commons has several potential solutions. One is to make the good excludable by charging a fee equal to the cost that using the good imposes on the system. Another solution, if possible, would be to divide up the common resource and assign individual property rights to each unit, thereby forcing consumers to internalize the effects that they are having on the good.

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Congestible Goods

It is probably clear by now that there is somewhat of a continuous spectrum between high and low excludability and high and low rivalry in consumption. For example, cable television is intended to have high excludability, but the ability of individuals to get illegal cable hookups puts cable television into somewhat of a grey area of excludability. Similarly, some goods act like public goods when empty and like common resources when crowded, and these types of goods are known as congestible goods.

Roads are an example of a congestible good since an empty road has low rivalry in consumption, whereas one extra person entering a crowded road actually does impede the ability of others to consume that same road.

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Club Goods

The last of the 4 types of goods is called a club good. These goods exhibit high excludability but low rivalry in consumption. Because the low rivalry in consumption means that club goods have essentially zero marginal cost, they are generally provided by what are known as natural monopolies. 

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Property Rights and Types of Goods

It's worth noting that all of these types of goods except for private goods are associated with some sort of market failure. This market failure stems from a lack of well-defined property rights.

In other words, economic efficiency is achieved only in competitive markets for private goods, and there is an opportunity for government to improve upon market outcomes where public goods, common resources and club goods are concerned. Whether the government will do this in an intelligent matter is unfortunately a separate question!