Classification of Economic Goods PDF

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CLASSIFICATION OF ECONOMIC GOODS Private good Most of the goods available in the market are private goods. They are rival in consumption which means that consumption by one person reduces the quantity available for the others. Also, private goods are excludable which implies that consumption of a private good like burger excludes the others from consuming it. In short, private goods are those goods which yield satisfaction only to the person consuming the good. It excludes or denies others to use that good. For example, a cup of milk consumed by a person gives satisfaction to that person only and it cannot be consumed by anyone else. Public good A public good, as opposite to private good, is non-rival and non-excludable in its consumption. The consumption of a public good by one person does not reduce its availability for others. Also, it is difficult to exclude people form consuming it. It means that public goods, once produced, give the same level of satisfaction to all the consumers. Public goods include national defence, dams, clean air, roads, bridges, flood control measures, etc. The non-excludability and non-rivalry are however the characteristics of pure public goods. In real world, the public goods may not be completely non-rival in their consumption, it may be possible that excess consumption of a public good like road my lead to congestion and it will adversely affect the satisfaction derived from the public good. Similarly, not all public goods are non-exclusive. In the provision of a public good like cable television, some houses may be excluded if the cable company refuses to hook up one more house in their system. It means that there may be some public goods which may be rival but non-excludable or nonrival but excludable. All such public goods are called as impure or quasi-public goods. Merit good Sometimes, the public sector may decide to actively participate in the allocation of certain economic goods which are essentially private goods-rival and excludable in consumption-and therefore can be otherwise supplied by the private sector. These economic goods are considered by the government as meritorious or important as they generate large social benefits for every individual and the society. Examples of such goods and services are education, healthcare, job training program, public library and others. For these goods, the government thinks that everybody in a society should consume a certain level of these goods irrespective of their ability to pay for those goods and also believes that if left to the private sector alone, these goods will be under provided. These governmentally supplied or heavily subsidized private goods are called the Merit goods in economics. In other words, merit goods are those goods and services with large social benefits which the government feels that people will under consume if left to private market alone and which ought to be subsidized or to be provided free of cost so that everybody can consume it regardless of their ability to pay for the good.

Merit goods are under provided or supplied at a less than optimal level by the private sector because the private market for such goods suffers from market failure that is the equilibrium outcome of the private market does not maximize social efficiency. There are two main reasons for this market failure: Firstly, consumption of merit goods generate large positive externalities which means social marginal benefit (SMB) from merit goods consumption exceeds the private marginal benefit (PMB) that is SMB>PMB. For example, we can think about education. An individual receives private benefit from education through higher productivity, income and better job in his or her life but others in the society also gains in terms of social benefit to get an educated, enlightened and responsible citizen. Therefore, consumption of education does not only creates benefit for that person but also for others in the society which is not accounted for in the private market equilibrium. Secondly, people suffers from imperfect information regarding the consumption of merit goods. Government feels that individuals may not act in their own best interest partly because they don’t have complete information about the long term benefits of merit goods. Let’s take the example of education again. Education is a long term investment decision for children. The costs of education are paid in the current period but the benefits from education in terms of higher productivity, income, greater occupational mobility, better employment opportunities could be received in distant future. Sometimes, people are unaware of these long term benefits of education for their children and therefore, under consume it. Also, the equity ground is another argument for the public provision of merit goods. Families with low income do not have the ability to pay for their children’s education even when they know the benefits of education. Therefore, subsidized or free education from government can help them to attain that desired level. Apart from merit goods whose consumption and production is in the broader interest of an economy, there are demerit goods which are considered undesirable for consumption and whose use is discouraged by the government. The examples of demerit goods or merit bads include tobacco products, liquor, etc. These goods have adverse effects on the people consuming these products and these also have negative external effects on the social welfare, so these goods are discouraged by imposing taxes and by imposing market regulations on their consumption and production. Club Goods Club goods are a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs. Often these goods exhibit high excludability, but at the same time low rivalry in consumption. Thus, club goods have essentially zero marginal costs and are generally provided by what is commonly known as natural monopolies. Furthermore, Club goods have artificial scarcity. Club theory is the area of economics that studies these goods. One of the most famous provisions was published by Buchanan in 1965 "An Economic Theory of Clubs," in which he addresses the question of how the size of the

group influences the voluntary provision of a public good and more fundamentally provides a theoretical structure of communal or collective ownership-consumption arrangements. 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. Public goods with benefits restricted to a specific group may be considered club goods. Specific examples for private club goods are memberships in gyms, golf clubs, or swimming pools. Both organisations 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 member of a club pool. By charging membership fees, every club member pays for the pool, making it a common property resource, but still excludable, since only members are allowed to use it. Hence, the service is excludable, but it is nonetheless non-rival 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. Local Public Good A public good that is available only within a limited geographical area. Examples include a radio signal that can be received only within a limited distance of the transmitter, and a school that restricts admission to a defined catchment area. Local public goods are important for understanding the economics of fiscal federalism. The key feature of local public goods is that consumers reveal their preferences when they make a choice of jurisdiction in which to reside. The Tiebout hypothesis argues that this effect ensures competition between jurisdictions to attract population and can thus achieve economic efficiency. Global Public Goods A global public good can be defined as a public good whose benefits and/or costs are strongly universal across countries, people, and generations. It has the traditional features of nonrivalry and non-excludability, but it is also characterized by a universal spread of the benefits and costs.

Characteristics of a global public good

Non-rivalry

Non-excludability

Universality

•Public goods are intended for collective consumption. •The consumption by an individual of a certain good not reduce the quantities available to all other individuals.

•No individual can be excluded from the benefits of a public good even if they do not pay its price. •This stems from the indivisibility of a public good which makes exclusion either technically impossible or too expensive.

•The benefits and/or costs of the public good are strongly universal across countries, people,and generations.

The term “global public good” was introduced by Joseph Stiglitz in 1995, who also listed five examples of such goods – international economic stability, international security, the global environment, international humanitarian assistance and knowledge....