BBEK 1103 960711086196001 economics PDF

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< BACHELOR OF BUSINES ADMINISTRATION WITH HONOURS >

< SEPTEMBER / 2020 >

< BBEK 1103>

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Table of Content Content Table of Content

Pages 2

1.0 Introduction

3-9

2.0 Content

10 - 12

3.0 Conclusion

13

5.0 Reference

14

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1.0 Introduction to 4 types of Public Goods In economics, goods can be categorized in many different ways. One of the most common distinctions is based on two characteristics: excludability and rivalrousness. That means we categorize goods depending on whether people can be prevented from consuming them (excludability) and whether individuals can consume them without affecting their availability to other individuals (rivalrousness). Based on those two criteria, we can classify all physical products into four different types of goods: private goods, public goods, common resources, and club goods. We will look at each of them in more detail in the picture and the paragraphs below. There are four categories of goods in economics, which are defined based on two attributes. The first attribute is excludability, or whether people can be prevented from using the good. The second is whether a good is rival in consumption: whether one person’s use of the good reduces another person’s ability to use it. National defense provides an example of a good that is non-excludable. America’s national defense establishment offers protection to everyone in the country. Items on sale in a store, on the other hand, are excludable. The store owner can prevent a customer from obtaining a good unless the customer pays for it. National defense also provides an example of a good that is non- rivalrous. One person’s protection does not prevent another person from receiving protection. In contrast, shoes are rivalrous. Only one person can wear a pair of shoes at a time. Like a picture shown below (picture 1)

(Picture 1) Page 3 of 15

1.

Private Goods Private goods are those that are both excludable and rivalrous. In other words, people can be prevented from benefiting from the product. At the same time, the more one person consumes, the less there is available to others. Private Goods are products that are excludable and rival. They have to be purchased before they can be consumed. Thus, anyone who cannot afford private goods is excluded from their consumption. Likewise, the consumption of private goods by an individual prevents other individuals from consuming the same goods. Therefore, private goods are also considered rival goods. Examples of private goods include ice cream, cheese, houses, cars, etc. Such examples include: electronics, food, clothing, furniture, and most consumer goods. Private goods are excludable and rival. Examples of private goods include food, clothes, and flowers. There are usually limited quantities of these goods, and owners or sellers can prevent other individuals from enjoying their benefits. Because of their relative scarcity, many private goods are exchanged for payment. A private good is both excludable and rivalrous. In economics, a private good is defined as an asset that is both excludable and rivalrous. It is excludable in that it is possible to exercise private property rights over it, preventing those who have not paid from using the good or consuming its benefits. For example, person A may have the means and will to pay $20 for a t-shirt. Person B may not wish to pay $20 or may not be able to do so. Person B would not be able to purchase the t-shirt. Additionally, the private good is rivalrous in that its consumption by one person necessarily prevents consumption by another. When person A purchases and drinks a bottle of water, the same bottle of water is not available for person B to purchase and consume. A private good is a scare economic resource, which causes competition for it. Generally, people have to pay to enjoy the benefits of a private good. Because people

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have to pay to obtain it, private goods are much less likely to encounter a free-rider problem than public goods. Thus, generally, the market will efficiently allocate resources to produce private goods.

In daily life, examples of private goods abound, including food, clothing, and most other goods that can be purchased in a store. Take an example of an ice cream cone. It is both excludable and rivalrous. It is possible to prevent someone from consuming the ice cream by simply refusing to sell it to them. Additionally, it can be consumed only once, so its consumption by one individual would definitely reduce others’ ability to consume it. Like a picture shown below (picture 2)

(Picture 2)

Ice Cream Cone: An ice cream cone is an example of a private good. It is excludable and rival. 2.

Public Goods Individuals cannot be excluded from using a public good, and one individual’s use of it does not limit its availability to others. A public good is a good that is both nonexcludable and non-rivalrous. This means that individuals cannot be effectively excluded from its use, and use by one individual does not reduce its availability to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems, and street lighting. The production of public goods results in positive externalities for which producers don’t receive full payment. Consumers can take advantage of public goods without Page 5 of 15

paying for them. This is called the “free-rider problem.” If too many consumers decide to “free-ride,” private costs to producers will exceed private benefits, and the incentive to provide the good or service through the market will disappear. The market will thus fail to provide enough of the good or service for which there is a need. For example, a local public radio station relies on support from listeners to operate. The station holds pledge drives several times a year, asking listeners to make contributions or face possible reduction in programming. Yet only a small percentage of the audience makes contributions. Some audience members may even listen to the station for years without ever making a payment. Those listeners who do not make a contribution are “free-riders.” If the station relies solely on funds contributed by listeners, it would under-produce programming. It must obtain additional funding from other sources (such as the government) in order to continue to operate. The free-rider problem is why the government often provides public goods. 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 can't 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. 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 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

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to society (including the deadweight loss caused by the tax). 3.

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, through consuming a good that has a 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. Common resources are susceptible to overuse and congestion. Because individual and group interests are in conflict, they create incentives for users to ignore the social costs of their extraction decisions, as the group has to bear the cost of managing, protecting and nurturing the resource. This is why they are prone to the tragedy of the commons, when every individual tries to reap the greatest benefit from a given resource. For example, fishermen have an incentive to harvest as many fish as possible, because if they do not, someone else will—so without management and regulation, fish stocks soon become depleted. And while a river might supply many cities with drinking water, manufacturing plants might be tempted to pollute the river if they were not prohibited from doing so by law, because someone else would bear the costs. Common

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goods are typically regulated and nurtured in order to prevent demand from overwhelming supply and allow for their continued exploitation. Other examples of common resources include forests, man-made irrigation systems, fishing grounds, and groundwater basins. The tragedy of the commons is a parable ostensibly about a common resource. In the original version of the tragedy of the commons, a shepherd grazes his flock on the green grass in a common meadow. A second shepherd, seeing the green grass figures that it will be best for his herd to also graze there. Soon, even more shepherds determine that it is also best for them to let their sheep graze in the meadow. However, by each acting in their own self-interest, all of the grass is devoured and there is nothing left to feed any of the sheep. In economic terms, the tragedy of the commons may occur when an economic good is both rivalrous in consumption and non-excludable. These types of goods are called common resource goods (as opposed to private goods, club goods, or public goods). A good that is rivalrous in consumption means that when someone consumes a unit of the good, then that unit is no longer available for others to consume; all consumers are rivals competing for the good, and each person’s consumption subtracts from the total stock of the good available. Note that in order for a tragedy for the commons to occur the good must also be scarce, since a non-scarce good cannot be rivalrous in consumption. A good that is non-excludable means that individual consumers are unable to prevent others from also consuming the good. 4.

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 is known as natural monopolies. Club goods are excludable but non-rival. This type of good often requires a “membership” payment in order to enjoy the benefits of the goods. Non-payers can be prevented from access to the goods. Cable television is a classic example. It requires a

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monthly fee, but is non-rival after the payment. Club goods are products that are excludable but non-rival. Thus, individuals can be prevented from consuming them, but their consumption does not reduce their availability to other individuals (at least until a point of overuse or congestion is reached). Club goods are sometimes also referred to as artificially scarce resources. They are often provided by natural monopolies. Examples of club goods include cable television, cinemas, wireless internet, toll roads, etc. Examples of club goods include cinemas, cable television, access to copyrighted works, and the services provided by social or religious clubs to their members. The EU is also treated as a club good since the services it provides can be excluded from non-EU member states, but several services are non-rival in consumption. These include the free movement of goods, services, persons and capital within the Internal Market, and participation in a common currency: for example, adding extra countries to the Schengen Area would not make it more difficult for citizens of current EU members to move between countries. Public goods with benefits restricted to a specific group may be considered club goods. For example, expenditures that benefit all of the children in a household but not the adults. The existence of club goods for children may offset the effects of sibling competition for private investments in larger families. While a large number of children in a family would usually reduce private investment ratios per child, due to competition for resources, the effects of a larger family on club goods are not as straightforward. As a result of economies of scale, investment ratios in club goods may eventually increase, since the relative price decreases when, in this example, a larger family consumes a club good. They are called child-specific goods and can also be referred to as club goods. Specific examples for private club goods are memberships in gyms, golf clubs, or swimming pools. Both organizations generate additional fees per use. For example, a person may not use a swimming pool very regularly. Therefore, instead of having a private pool, you become a member of a club pool. By charging membership fees, every club member pays for the pool, making it a common property resource, but still

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excludable, since only members are allowed to use it. Hence, the service is excludable, but it is nonetheless nontrivial in consumption, at least until a certain level of congestion is reached. The idea is that individual consumption and payment is low, but aggregate consumption enables economies of scale and drives down unit production costs.

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2.0 Content When it comes to private cars, you will think of Toyota. They have a famous saying: All about the drive. Let’s talk about the Toyota Company. Toyota Motor Corporation is a Japanese multinational automotive manufacturer headquartered in Toyota, Aichi, Japan. In 2017, Toyota's corporate structure consisted of 364,445 employees worldwide and, as of December 2019, was the tenth-largest company in the world by revenue. Toyota is the largest automobile manufacturer in Japan, and the second-largest in the world behind Volkswagen, based on 2018 unit sales. Toyota was the world's first automobile manufacturer to produce more than 10 million vehicles per year, which it has done since 2012, when it also reported the production of its 200 millionth vehicle. As of July 2014, Toyota was the largest listed company in Japan by market capitalization (worth more than twice as much as number 2ranked Softbank) and by revenue. Toyota is the global market leader in sales of hybrid electric vehicles, and one of the largest companies to encourage the mass-market adoption of hybrid vehicles across the globe. Toyota is also a market leader in hydrogen fuel-cell vehicles. Cumulative global sales of Toyota and Lexus hybrid passenger car models achieved the 15 million milestone in January 2020. Its Prius family is the world's top-selling hybrid nameplate with over 6 million units sold worldwide as of January 2017. The company was founded by Kiichiro Toyoda in 1937, as a spinoff from his father's company Toyota Industries, to manufacture automobiles. Three years earlier, in 1934, while still a department of Toyota Industries, it developed its first product, the Type A engine, and its first passenger car in 1936, the Toyota AA. Toyota Motor Corporation produces vehicles under five brands, including the Toyota brand, Hino, Lexus, Ranz, and Daihatsu. It also holds a 20.02% stake in Subaru Corporation, a 5.9% stake in Isuzu until 2018, a 5.1% stake in Mazda, a 4.9% stake in Suzuki, as well as joint-ventures with two in China (GAC Toyota and Sichuan FAW Toyota Motor), one in India (Toyota Kirloskar), one in the Czech Republic (TPCA), along with several "nonautomotive" companies. TMC is part of the Toyota Group, one of the largest conglomerates in Japan.

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Private car is below to Private Goods, Let’s pretend it’s your lucky day and you get to buy your dream car. You head to your local dealership and find exactly what you want. You can’t just drive the car off the lot, though. You have to pay the dealer first. If you can’t pay, you can’t have the car. But you can, and you do, and you drive off. Your new car is yours, and it’s a private good. I know that may seem obvious, but “private good” is actually a technical economics term. For a good to be a private good, it must meet two conditions: It must be excludable and rival. When a good is excludable, the supplier of the good can keep nonbuyers from obtaining that good. So, in the case of the car, if you did not pay for it, the dealer would not have given you the keys and ownership title—you would be excluded from owning it. When a good is rival, one person’s consumption—or use—interferes with another’s ability to consume it. If you drive your new car to the mall on the north side of town, I can’t take it to the movie theater on the south side. The car is “rival.” One person driving it keeps another person from driving it. So, cars are private goods because they are excludable and rival.

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A good company also has its crisis, and beside the customer I have some suggestion to this company. First, at the end of 2009, Toyota Motor Corporation recalled 9 million vehicles because of reports that several vehicles accelerated unexpectedly. Sudden unexpected acceleration (SUA) is the main crisis facing Toyota. The chain of reactions leading to a series of other problems. My suggestion is that Toyota's senior management must come out to explain the cause of this problem, so that customers understand so as not to lose confidence in the company. Second, in February 2010, the hybrid anti-lock braking software was also recalled. Although this recall is different from the initial placement of floor mats by mistake, it has affected Toyota's image and brand name globally. In my opinion, the company's QMD department must be vigilant and accountable for this issue. Maybe they overlooked some parts that need to be checked and caused this problem. Next, following the economic downturn in 2009, Toyota faced further financial problems due to the recall of faulty vehicles. This caused a lot of work to be lost, and the value of the stock plummeted by 15%. In my suggestion, while we agree that the recall was a good solution, it would have been better for Toyota to tackle the faulty vehicles the moment complaints started coming in. The company should not have tried to hide the reports in order to save their branding. Rectifying the problem immediately would have definitely prevented further problems and possible accidents. It would have also restored consumer confi...