Question

Define rivalry and excludability and use these terms to discuss the four categories of goods.

Short answer

Rivalry refers to a scenario where an individual's consumption of a good reduces its availability for others, while excludability is a property allowing prevention of individuals from using a good. Applying these definitions, private goods are both rival and excludable, public goods are neither rival nor excludable, common resources are rival but not excludable, and club goods are non-rival but excludable.

Step-by-step solution

Define Rivalry and Excludability

Rivalry in consumption refers to a situation where individual's consumption of a good leads to reductions in the availability of that good for others. Excludability, on the other hand, refers to a property of a good whereby a person can be prevented from using it. Excludability is the feasibility and desirability to exclude individuals from the benefits of a good.

Classify Private Goods

Private goods are both rival in consumption and excludable. This means that the consumption of these goods by an individual prevents other individuals from consuming the same goods, and it is also possible and desirable to prevent individuals who did not pay for the goods from consuming them. For example, a slice of pizza is a private good because once one person consumes it, others cannot do so. And that person can be prevented from consuming the slice unless they purchase it.

Classify Public Goods

Public goods are neither rival in consumption nor excludable. No matter how many individuals consume these goods, their availability does not get depleted, and it is not possible or desirable to prevent individuals who did not pay for them from consuming them. An example of this would be clean air, as one person breathing clean air does not prevent others from doing so, and people can't be prevented from breathing clean air even if they didn't pay for it.

Classify Common Resources

Common resources are rival in consumption but not excludable. This means that the consumption of these goods by an individual reduces their availability for others, but it's not possible to prevent individuals who did not pay for them from consuming them. A fish in the ocean would be a common resource as one person catching a fish reduces the number of fish available for others, but it's not possible or appropriate to prevent people from fishing in the ocean.

Classify Club Goods

Club goods are non-rival in consumption but excludable. These goods can be consumed by numerous individuals simultaneously without reducing their availability, but it's possible and desirable to prevent individuals who did not pay for them from consuming them. An example of a club good could be a cinema screening. A person watching a film does not prevent others from doing so, but those who didn't purchase a ticket can be prevented from entering the cinema.

Key concepts

Rivalry in Consumption

The concept of rivalry in consumption is fundamental to understanding how different goods and services impact resource availability when consumed. Imagine you are at a picnic and there's only one apple pie. If one person takes a large slice, there's less pie available for everyone else. This situation is a textbook example of rivalry in consumption, where one individual's consumption of a good directly reduces the amount available for others.

In economics, numerous goods exhibit this property. A candy bar, a concert ticket, or a gallon of gasoline all become scarce as people consume them. Rival goods are at the heart of many market dynamics as businesses and individuals navigate the demand and supply for these limited resources.

Excludability in Goods

The term excludability refers to whether a good or service can be restricted to only those who have paid for it. Take, for example, a WiFi connection. If you set a password, you can exclude those who don't have the password from using it. This exclusiveness means that providers can charge a price, allowing them to recoup the costs and potentially make a profit.

Excludability is a key factor in determining the economic nature of goods. It's important to note that not all goods are excludable. Some, like a beautiful sunset or national defense, are available for everyone to enjoy regardless of whether they've directly paid for them.

Private Goods

A private good is what many of us are most familiar with in our everyday transactions. They are both rival in consumption and excludable. Examples abound, from a cup of coffee to a pair of shoes. These items are private goods because if you buy and consume them, no one else can, and businesses can easily prevent people who don't pay from using them.

In a free market economy, private goods are efficiently allocated through market mechanisms, with prices adjusting based on the forces of supply and demand. Their private nature incentivizes creators and suppliers to continue producing and innovating, as they can directly reap the benefits of their efforts.

Public Goods

On the other end of the spectrum are public goods. These goods are neither rival in consumption nor excludable. The classic examples—national defense, public parks, and the air we breathe—demonstrate how public goods are for everyone's benefit. One person's enjoyment of a peaceful park stroll doesn't diminish another's experience.

Because they are non-excludable, it's not feasible to charge individuals directly, leading to a need for public provision and funding, usually through taxation. Public goods challenge markets because they can lead to what economists call 'free riders'—people who benefit without contributing to the costs—making government intervention often necessary to ensure they are provided.

Common Resources

Common resources present a unique challenge. These goods are rival but not excludable. Think of a fish in the sea or a community forest. If a fisherman catches fish, there are fewer fish for others, highlighting their rivalry. However, preventing people from fishing without proper entitlements (making it excludable) can be difficult especially in international waters or large forests.

Common resources are susceptible to overuse and depletion—a problem known as the 'tragedy of the commons.' This issue arises because individuals don't bear the full cost of their consumption, leading them to overuse the resource, thereby reducing its availability for everyone. Managing common resources often requires regulation or community-based solutions to avoid depletion.

Club Goods

Club goods, also known as artificially scarce goods, are non-rival in consumption but excludable. Movie streaming services, gym memberships, and private parks fit this category. These services can be enjoyed by many simultaneously without affecting each other's enjoyment—hence, non-rival. But, they can be exclusive to paying customers.

The exclusivity of club goods allows providers to charge an access fee or subscription, creating a revenue model while also controlling demand. These goods often operate within a closed market where access is limited to maintain quality and exclusivity.