In economics there are four categories by which we
describe goods. It is helpful to think
in these terms because being able to label characteristics on things allows us
to be more informed when making decisions about how it should be treated with
regards to property rights, legislation, etc.
The four goods are private, public, natural monopolies, and common
resources. The one that a particular
good falls into depends on two qualifications: two questions that we ask of
it. The first is, “is it excludable?” This essentially asks if the good can be kept
from people. Apples are excludible
because a farmer or grocery store can choose to sell or not sell. Roads, with
the exception of private and toll roads, are non-excludible because unless
there is some interruption in normal operation, anyone can go on roads at any
time. The second question is, “is it ‘rival
in consumption’?” “Rival in consumption”
is a phrase that means when one person uses it, there is less for everyone else
to use. Tea bags are rival in
consumption. When one is stepped, then the
number of usable tea bags in the world has shrunk by one. Fire alarms, on the other hand, are not rival
in consumption. When one person hears
it, everyone else can hear it just as well and there is just as much fire alarm
to be heard regardless of how many people are within earshot.
The
first good, private goods, is pretty straightforward. It is anything that is both excludable and rival
in consumption. Apples are private
goods. “Apples to Apples”, the game, is
a private good. Apple sauce is a private
good. Apple iPads are private
goods. I won’t belabor the point:
private goods are easy to understand.
The
second good, public goods, is also fairly easy to comprehend. Though, to be fair, it is a little more
difficult to think of examples for. Public
goods are non-excludable and non-rival in consumption. In other words, people cannot be kept from
using them and their use by some people does not diminish the usefulness of them
to others. Lighthouses are a public
good. A lighthouse just sits out there
shining its light to the sea. When one
boat sees the light, it can still be fully seen by other boats. In normal operation, it is not excludable
either because it isn’t feasible to try to hide the light from some people and
not others. The military is also a public good. Whether there are 250 million or 300 million
people in America, there will still be the same public defense system that keeps law-abiding citizens safe. It’s non-rival and non-excludable. General knowledge is also a public good, like
math and science.
Things
get a little dicier when it comes to the intermediate natural monopolies and
common resources. Natural monopolies are
goods that are excludible but non-rival in consumption. (They are also known as “club goods”.) Cable television, satellite radio, the
internet, and movie theater shows are all kinds of natural monopolies. Intellectual property is a kind of knowledge
that is a natural monopoly. The owners
of a patent will share it with their constituents and it can be shared as much
or as little as the owners desire, with no loss to the original creator. It is important to note that intellectual property
can only legally to be used for those intended to have it. I put “legally” in because patents and other
intellectual property can be stolen
with various effects, but all laws being abided, intellectual property is a
natural monopoly. Also, spoiler alert, intellectual
property deserves a post of its own in the near future. Public education is another natural
monopoly. Its non-excludability is literally
legislated. Yet the quality suffers as
quantity of children in each class increases.
As such, there is certainly some level of rivalry in consumption
regarding a teacher’s lesson.
Common
resources, another category that deserves its own post, are defined as goods
that are non-excludable but rival in consumption. This gets into all sorts of sticky situations
like the “tragedy of the commons” and “collective action problems” that could
be written about in detail until the world runs out of resources entirely. What are some non-excludible yet rival in
consumption goods? Fish in international
water, the atmosphere, fresh water wells, oil reserves, unprotected forests, and
the like are all good examples. One characteristic
of common resources is fungibility. That
is, the ability to substitute from any source.
Oil from Venezuela burns just as well as oil from Saudi Arabia or Canada. A house can as easily be made from Oregonian
wood as Indonesian wood. Ownership is
the issue at stake here, which goes back to tragedy of the commons and
collective action problems. This is what
should be discussed in more depth later.
The
different categories of goods require different treatment. Private goods do not necessarily need
legislation to direct their use, though the government would probably disagree
with me and this is not a universal statement.
Public goods usually have to be provided by the government because of a
collective action problem. Natural
monopolies are the subject of some disagreement in the world because of intellectual
property rights and the like. Common
resources, however, are the cause of the most legislation and are the most
contentious of the four goods. Who owns
the electromagnetic spectrum? Is it
first-come-first-served? Who owns the
atmosphere or oil reserves? Knowing where
a good fits into the quadrant of goods allows us to be better informed citizens
when considering how it should be treated with relation to use and the law.
