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Types of Goods
Session 12

July 2018
Session Objectives

Types of goods

– Private goods
– Public goods
• Quasi public goods (merit goods)
– Non-rival private goods (club goods, artificially scarce
– Common resources
• Tragedy of the commons

• Implications for market equilibrium

National Disaster warning system
Public goods
Have positive externalities

Characteristics –

– Non-excludable: When people who don’t pay cannot be

easily prevented from using a good

– Non-rival: When one person’s use of a good does not

reduce the ability of another person to use the same good
Theory of Public Goods developed by
Paul Samuelson, the Nobel prize in Economics,

• Largely non-excludable – city roads, but exclusion

possible on some roads (toll)

• Rival in consumption as more people use it and leads

to congestion

• Quasi public good/Merit good – public good with a

private good feature
Education and healthcare?
Significant individual benefit and some spillover benefits
(positive externality). Hence, some subsidy can be justified.

Exclusion is common – fee based

Rival in nature – large class sizes, the quality of learning falls.

Online education –
Exclusion feasible
Main features Public goods Merit goods (tend to be
largely private goods)
Rivalry Non-rival rival

Excludability Non-excludable Excludable (people can

underestimate social benefit)

Benefits Strong positive externalities Large Individual benefit and

positive externalities

Provider Usually government Government and/or private

Financed by Usually taxation Taxes and/or prices

Examples National defence, law and order, Health, education

street lights, lighthouses
Net benefit to individuals

A street light has a cost of 6. The utility of the light is 4.


Pay and share

Do not pay
the cost

Raja Pay and share

1, 1 -2, 4
the cost

Do not pay 4, -2 0,0

What is the Nash equilibrium?

Free ride on others, under provision of public goods

• The incentive for the individual is to let others produce the
good and then use it once it is available for free.

• This is known as the free-rider problem: individuals have little

incentive to pay for their own consumption and instead will
take a “free-ride” on anyone who does pay.

• As a result, non-excludable goods tend to be under-produced.

Will the outcome change if the sufficiently large
penalty is imposed for not paying?

What should be the minimum penalty to ensure

Net benefit to individuals

A penalty is imposed of 2 for non-payment and is enforced.


Pay and share

Do not pay
the cost

Raja Pay and share

1, 1 1, -1
the cost

Do not pay -1, 1 -1,-1

What is the Nash equilibrium?

Free ride on others, under provision of public goods

Public Goods

• Failure to provide public goods at the optimal level

can create substantial social costs

• Thus, the need to produce public goods provides a

strong argument for taxation and government

• But, some citizen become forced riders (via taxation)

How much of Public Goods?
• If the government provides the public good, how much of it
should the government produce?

• In practice this could be quite problematic.

– How much the societies value the good will not be known to
the government.
– For private goods, these problem is solved by the markets

• Voting and other democratic processes can help to produce

optimal amounts of public goods.

• Cost efficiency and innovation tends to suffer

Government provision of public good
in the Chinese style!
• One of Beijing’s busiest public toilets is fighting the scourge of toilet paper
theft through the use technology – giving out loo roll only to patrons who
use a face scanner.

• The automated facial recognition dispenser comes as a response to elderly

residents removing large amounts of toilet paper for use at home.

• Now, those in need of paper must stand in front of a high-definition camera

for three seconds, after removing hats and glasses, before a 60cm ration is

• Those who come too often will be denied, and everyone must wait nine
minutes before they can use the machine again.

Source: The Guardian (2017)

Public Goods

• Note - A public good is not defined as a good that is produced

in the public sector.

– If government started to produce soap, TVs, cloths that

would not make them public goods

– Postal service is provided by government, but it is not a

public good.

Does public good have to be provided by the
Is it possible to tie a public good with a private good?

• Public goods and private goods are sometimes ‘tied’ together.

Shopping malls – benches, restrooms, security - provide these
‘public goods

• Role for private entrepreneurs

Radio and television
Non-rival in consumption
Earlier, exclusion was not possible
It was a public good.

In the early decades of broadcasting, exclusion was not

technologically possible

But technology to “scramble” and de‐scramble TV signals was

invented So that broadcasters could charge a fee and exclude
non‐payers. (BBC charges license fee)
Scrambling technology has been superseded by cable and satellite
transmission, in which exclusion is possible.
Non-rival private good, an Artificially Scarce
Price of pay-per-view movie

Deadweight loss

0 Q Q
Quantity of pay-per-view movies watched
 An artificially scarce good or non-rival private good is
excludable but nonrival in consumption.

 Because the good is nonrival in consumption, the efficient

price to consumers is zero.

 However, because it is excludable, sellers charge a

positive price, which leads to inefficiently low

While non-rival in consumption, now it is excludable

Identifies every one of the 57 trillion 3mx3m squares on

the entire planet with just three, easy to remember,
• Other examples of artificially scarce good

– Computer software
– Pay-per view-movies
– Wi-fi (assuming there is no congestion)
Seinfeld – the parking space argument

Think about two features – rival v/s non-rival

excludable v/s non-excludable

A common resource - Unlike pure public goods, common

resources face problems of congestion or overuse, because they
are rival in consumption. Examples of common resources include
irrigation systems, fishing grounds, pastures, forests, water,
• Why tuna is
endangered but not

• Demand for chicken

higher than tuna
Common Resources and The Tragedy of the
• Since 1960 the tuna catch has decreased by 75%

Tragedy of commons
• Non-excludable but rival.
• You cant stop me from consuming the good
• And more I consume means less is available for you
• The resource depletes

Non-excludable: When people who don’t pay cannot be easily

prevented from using a good

But, rival in consumption - When one person’s use of a good

reduce the ability of another person to use the same good

Tragedy of commons - Tendency of any resource that is

unowned, and hence nonexcludable, to be overused and
39under-maintained – William Llyod 1833.
Tragedy of commons – the video
Elinor Ostrom –

Happy solutions to the tragedy

of Commons

The Noble prize in 2009

Solutions to the Tragedy of the Commons

• Enforcement of norms:
• Possible in small groups or majority people altruistic
• Overfishing - social disapproval.
• One who honors the norms is respected.

• Command and control is often ineffective:

• Limit the number fishing boats
– Fishing boats were made more efficient.
• Limit the number of days that fishing is allowed.
– Fishermen found ways to catch more fish/day.

Private Goods

Excludable and rival – most goods

• Efficiently provided in competitive markets.

– Strong incentive to pay for and thus to produce these goods.

– Since the goods are rival, excludability does not lead to

• The only people excluded from consuming a private good
in a competitive market are those who are not willing to
pay the costs of production.
Four Types of Goods

Four Types of Goods

Excludable Non-excludable

Rival Private Goods Common Resources

Jeans Tuna in the Ocean
Hamburgers The Environment
Contact Lenses Public Roads

Non-rival Nonrival Private Goods Public Goods

(club gods) Asteroid Deflection
Cable TV National Defense
Wi-Fi Mosquito Control
Digital Music
Has the rise of the Internet and file sharing turned media such as
movies and music into public goods?

• Movies and music are nonrivalrous but they used to be

excludable, making them nonrival private goods.

• Today, however, the ease of copying makes digital movies and

music nonexcludable. That makes movies and music transform
into public goods for a large portion of the population.