The Four Goods

            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.