PRIVATE GOOD (Encyclopedia)

Private goods are characterized by rival consumption and the ability to exclude non-payers. These are one of four types of goods differentiated by consumption rivalry and nonpayer excludability. The other three goods are public (non rival consumption and non-payers cannot be excluded), common goods (rival consumption and non payers cannot be excluded), and club goods (non rival consumption and non-payers cannot be excluded). Rival consumption and the ease of excluding non-payers means private goods can be efficiently exchanged through markets even though society may change the status quo according to its economic, political and cultural choices.

Adam Smith first articulated the concept of public and private goods. From then on, economists have studied systematically public goods and distinguished them form the opposite case of private goods.

This table 1 shows as privates goods are one of four types of goods – private goods, public goods, common goods, and club goods – differentiated by consumption rivalry (rival or non rival) and nonpayer excludability (excludable and non-excludable). Private goods are in the top left cell of the matrix, with rival consumption and the ability to exclude non-payers.

Private goods have also well-defined property rights that can be transferred to others, but only if others pay to acquire ownership.

It is almost as if society created markets for the expressed purpose of exchanging private goods.
In fact, in a market transaction a buyer gains access to a private good (or service) in exchange for money or, sometimes, in exchange for another good (or service). Buyers and sellers meet through the price mechanism, and if everything works well, the economy can reach a state of maximum efficiency in which resources are put to their most productive uses. A key condition for a market transaction, however, is that the ownership or use of a good can be transferred or denied conditional on the payment of its price. So private goods are ideally suited for efficient market exchanges.

Examples of private goods range far and wide, from candy bars to cars, to comic books, to corduroy sport coat. In fact, not all but most goods traded through markets are private goods.

Non-payers can be excluded from consumption and they should be. This way efficiency is achieved if those who consume a private good pay a price equal to the marginal cost of rival consumption imposed on others.

Rival consumption

Because private goods are rival in consumption, the consumption by one person prevents simultaneous consumption by others, and thus prevents others from receiving the benefits of consumption. This means consuming a private good imposes an opportunity cost on others who are not able to consume.

Suppose, for example, that an individual is pondering the consumption of a sandwich. When he consumes this sandwich, he and he alone receives the satisfaction and the benefits provided. Moreover, when he consumes the sandwich, no one else, can consume it. Other people, in other words, foregoes the satisfaction that they could have received from the sandwich, and thus incur an opportunity cost.

Non-payer Excludability

Private goods are also characterized by the ability to exclude non-payers from gaining ownership and control, and thus from receiving the benefits of consumption. In other words, private goods have well-defined property rights.

The owner of a private good can set and enforce the term by which the ownership of the good is transferred to another.

Again, let us turn to the example of the consumption of a sandwich. The producer has ownership and control of the sandwich and also the ability to transfer that ownership and control on his term. Suppose the term the producer has set is a 2 euro price. If an individual wants to gain ownership of the sandwich, presumably to eat, then he must pay the 2 euro price. No payment means no sandwich.

Private goods as social constructs

The conventional approach to defining a private good is to identify a good’s rival and excludable properties (table 2), then define the good as private based on those properties, But the problem is that the properties of goods do not always correspond to this standard definition. The main reason is that society can modify the rivalry and excludability of a good’s benefits. In this way goods often become private as a result of deliberate policy choices.

This is the reason why in many if not most cases, goods exist not in their original forms but as social constructs, largely determined by policies and other collective human actions.

As said before, rival benefits mean that one person’s consumption of a good diminishes its availability for others. For example, if one person consumes a glass of milk, it is no longer available for others. Although the link between rivalry in consumption and excludability of benefits is not always automatic, the example of the glass of milk shows that by consuming a rival good, a person can exclude others from its enjoyment. In this sense milk is both a rival and an excludable good, and so falls into quadrant 1 of table 2. It is a private good.

Another example, land, is also both rival and excludable in its original state. Land has been a source of conflict throughout history. Many struggles over land continue, but many societies have introduced property rights regimes that regulate land ownership, minimize uncertainty, and reduce the need for constant vigilance to defend territories against potential claimants.

Thus property rights make excludable goods, such as land, a private good of recognized and reliable stature. Private goods usually have clear property rights specifying who has the exclusive right to determine how they can be used, including the ability to trade them in the market.

Even though land is a rival and excludable good, many traditional societies maintain open, nonexclusive grazing and hunting grounds. And some communities still manage as commons such natural resources as land, forests, water, and plant and animal species. These approaches reconfirm that excludable resources do not necessarily have to be made private or exclusive. Doing so is a policy choice, and often a societal choice to ensure the sustainable use of certain goods (quadrant 1, table 2).

If we compare the standard classifications in table 2 with those in table 3, we may notice an important difference: in table 3 goods are settled primarily according to their socially constructed status. The main difference between the two sets of classifications lies in where, in terms of “private” and “public”, goods fall when assessed according to their basic properties and their socially determined status (quadrants 1 - 2A - 4A are referring to the "private domain", while quadrants 2B - 3 - 4B to the "public domain"). 

To better understanding we may consider the example of the atmosphere. In table 2 it is in quadrant 4 as a rival, non-excludable, open-access good. Table 3 also lists the atmosphere in quadrant 4, but with a difference. In quadrant 4B, which is part of the public domain, the atmosphere is listed in its familiar form, as a common pool resource. But today there is a deep debate on how atmosphere’s status should be assessed. Because of policy debates on global environmental issues, the atmosphere is increasingly linked to new, human-made private products—namely, permits (allowances) for pollution (especially carbon dioxide) emissions.

Such permits do not turn the atmosphere into a private good, but they limit some actors’ use of it in a particular way. If an international agreement were to enter into force what would become a private (national) entitlement is a specific aspect of this resource: the right to use the atmosphere as a “pollution sink” or, more precisely, to emit certain types and amounts of gases into it. Limiting its use in this way would preserve the atmosphere so that all actors could enjoy it more broadly. Hence the atmosphere appears twice in table 3: in quadrant 4A because of national and international arrangements to preserve it and in quadrant 4B because—clean or not—it is available to be consumed by all people.

Non-rival goods have experienced similar policy-induced shifts. Some scholars have expanded the standard definition of non-rival goods to include those that can be made available to additional users at minimal or no cost. For example, a new chemical formula could be shared with the concerned professional community simply through an email.

Yet many knowledge elements are made exclusive and private through property rights. In the form in which society often likes to see them, they fall into quadrant 2A of table 3 in the private domain, as non-rival but exclusive goods. An example is manufacturing procedures protected by process patents.

Rival goods can also be kept or made nonexclusive; see quadrant 4B of table 3. As said before for land, one policy option for doing so is to create a management regime that maintains broad public access. Public parks and nature reserves are examples. Another is to make rival goods available in such plentiful quantities that there need not be any competition over who gets to use them. Many societies have chosen this policy route for basic education and health services.

This approach is usually taken for two reasons. First, goods such as education and health are often seen as human rights and as having intrinsic value. Societal notions of fairness might require that education be made available to all in the spirit of commodity egalitarianism. Second, an educated and healthy population generates important private and public benefits. Educated people tend to be more productive and to contribute more to economic growth and development. Thus many countries have made basic education not just free and universal but compulsory as well.

If basic education is assessed only in terms of its natural properties, it falls into quadrant 1 (as private good, rival and excludible). But when judged on its actual form, as in table 3, it must appear three times. In quadrant 1 it tables as a private good of educated individuals. In quadrant 4B it appears as a universally available, nonexclusive service. And in quadrant 3 it shows up as having added to a country’s overall productivity and economic growth potential. Two of its dimensions (in quadrants 4B and 3) are in the public domain.

Moreover, goods can change their positions if new technology develops. Television signals are a case in point. There was no question of public or private television before it became possible to scramble television waves and to restrict transmission through cables. Now some channels can be viewed only for a fee. As a result television falls partly in the private domain (quadrant 2A in table 3) and partly in the public (quadrant 2B).

Returning to quadrant 3, the main goods are policy outcomes or overall conditions such as peace, law and order, financial stability, efficient markets, and communicable disease control and eradication. Once these conditions exist, all people can—and sometimes must—consume them. The goods’ benefits are indivisible, so they exist for all in the same amount and with the same characteristics. These goods are often more evident when undersupplied. For example, conflict is more noticeable than peace, which is often taken for granted. Similarly, people realize that they are “part of the market” much more when a stock market crashes and the value of their investments tumbles.

Hence table 3 illustrates that in most if not all cases, privateness - and plubicness as well - are social constructs.
According to this analysis we can say that too often it is assumed that a rival and excludable good must be private and is best left to the market.

That approach misses a basic point. Before goods appear in the market, policy choices have been made or norms established to make the goods private in the sense of being exclusive or public in the sense of being nonexclusive. And even if these decisions have already been made in the past, that does not preclude rethinking them in light of new realities.







Bibliography

Corner R. and T. Sandler (1993), "Private Provision of Public Goods under Price Uncertainty", Social Choice and Welfare, Vol. 10, No. 4.
Epple D., R. E. Romano (1996), “Public Provision od Private Goods”, Journal of Political Economy, Vol.104, No.1.
Kaul, I., Grunberg, I. and M. A. Stern (1999), Defining Global Public Goods, New York, Oxford University Press.
Kaul, I., R. U. Mendoza (2003), “Advancing the Concept of Public Goods”, in I. Kaul, et. al, Providing Global Public Goods: Managing Globalization, New York, Oxford University Press.

Editor: Francesca BERTI