Economists categorize goods and services according to their characteristics. For example, some goods are considered exclusive while others are not. An exclusive good is one in which the consumer has the exclusive right to use the good or service, and that they are able to exclude others from using it: that is, they don’t have to share. A good
that is non-exclusive is the opposite: we cannot exclude others from using the good or service, and it is not exclusively ours.
The second characteristic has to do with being consumptive. If a good is consumptive (or rival), it means that it can be consumed to completion. Alternatively, when a good is non-consumptive, use of that good will not reduce the total amount available for others. These two definitions will become more clear when we consider them together using a matrix.
Let’s take a look at Table 8-1. The degree of exclusivity is shown in columns two and three, and the degree of rivalry is shown in rows two and three. The first of type of good we can look at is one that is exclusive and rival. That means that you can prevent people from using the good (you can exclude others) and that once you’ve consumed or used it, it’s gone or unavailable for others. A cow is considered a private good. Once you own the cow (or use it), it is unavailable for anyone else. It is also exclusive in that you tag its ear and can prove and protect ownership (unless someone decides to do some cattle rustling).
Next let’s consider common goods. These are goods that are consumptive/rival meaning that once it’s captured, used, consumed, it’s gone… off the market, or otherwise unavailable. The biggest problem with these types of goods is that we cannot prevent people from using or harvesting them, which can create huge problems. Almost any animal that has gone extinct results from being a common-type good. Consider the bison that roamed the plains before European settlers arrived. They were hunted to near extinction, yet they don’t differ a whole lot from a cow (not really). The difference is that we can prevent people from killing cows, but nobody could prevent people from hunting bison. They were owned when they were killed and there were significant incentives to kill as many as possible before their populations could recover.
Let’s look at club goods, which are exclusive but not consumptive. In this case, we can prevent people from using the goods, but our consumption of them doesn’t reduce the amount left for other people. The reason these types of goods are called “club” goods is that clubs fall into this category. If you have a membership to a golf club, or a country club, you must pay a fee to use the facilities. If you don’t, you cannot even get through the door! Once you’ve paid however, your presence won’t negatively affect anyone else (up to a point). If you were golfing and a second party came through to golf, there is certainly enough space for both parties to enjoy the game without negatively affecting each other. Cable TV also falls into this category meaning that you can’t access all the cable channels without paying your bill. Once you do, you are free to watch as much as you want without affecting your neighbour’s consumption: in other words, if you turn on the game, your neighbour’s TV will not shut down (although it would be fun sometimes if it would). Ditto for phones, Sirius radio, Internet service, etc. (up to a point).
The last category is public goods, which are neither exclusive nor consumptive. If you use it, or enjoy it, your consumption will not affect others’ consumption. You cannot be prevented from using a public good, and neither can anyone else. The classic examples are the lighthouse and national defense. If one more person comes to Canada, it’s impossible to provide national defense to everyone but that person. If a ship passes the lighthouse, it’s impossible to turn off the light for one ship, and if the ship sees the light, there isn’t less light for others by which to be guided.
We have our examples above, and the topic in case you forgot, is market failure. Which types of goods lead to market failure remembering that market failure occurs when goods or services are not allocated efficiently? Also remember:
Efficiency occurs where à marginal cost = price = marginal benefit
The cost of producing a private type good (meaning that it is exclusive and consumptive) is positive, and because it is possible to exclude others, markets exist where price fluctuates to ensure that markets clear, and supply equals demand, meaning the market is efficient. If there are no cases of information asymmetry, a monopolist does not produce the good, and there are no externalities, then there is no market failure.
What is the marginal cost of producing common goods? Another way to ask the question is “what is the cost of allowing one more person” to subscribe to cable TV, or the Internet, or Sirius radio? Before you answer, consider the price. Do you think the price is equal to the marginal cost? The answer is likely no. The cost of cable TV these days (without student discounts and special offers) starts at $80/month roughly. That’s $960/year without taxes. The marginal cost of delivering cable to one more person is likely much lower. In this case, there is market failure because the price is greater than the marginal cost (P > MC).
How does the government help to address market failure in the case of club goods? Regulations. The CRTC – the Canadian Radio-television and Telecommunications Commission regulates prices to ensure that consumers are not paying “too much” for such services. You can visit their website to learn more about how the regulate prices.
Public goods are interesting in that they are not exclusive meaning a business could not exclude people from using or consuming the good (and therefore would have a difficult time extracting payment), and that the marginal cost of provision is zero (the cost of having one more ship pass by the lighthouse, or providing national defense to one more person). That means to be efficient → price = marginal cost = zero. Because of these two facts, the government provides “public type” goods.
A word of caution, public provision and public-type goods are two different things.
Some examples are national parks (while there is a fee, it is relatively low), national defense, lighthouses, public parks, and highways (but not toll roads).
That leaves common goods, for which there is often market failure. What is the cost of overharvesting fish? Tuna, to be specific. Think of the last time you ordered a tuna sandwich at Subway, or made one yourself, or ate sushi. What was the cost? While it might not have been the Bluefin tuna, other tuna species are also in decline, and I’m betting the price didn’t reflect scarcity.
Market failure occurs because the world is overfishing – it is not possible to assign fishing limits, or to police the catch in the open ocean because no country has jurisdiction. That means many fish are not exclusive and because they are rival, once they’re gone, they might never come back. This means that the price is much lower than the marginal social cost of fishing (P < MSC). While the fisher incurs the short run costs of fishing (line, net, boat, labour, fuel, etc.) he does not have a long-term incentive to conserve because if he does, other fishers will get to the catch before.