THE DIFFERENT KINDS OF GOODS

How well do markets work in providing the goods that people want? The answer to this question depends on the good being considered. As we discussed in Chapter 7, a market can provide the efficient number of ice-cream cones: The price of ice-cream cones adjusts to balance supply and demand, and this equilibrium maximizes the sum of producer and consumer surplus. Yet as we discussed in Chapter 10, the Market cannot be counted on to prevent aluminum manufacturers fr.om polluting the air we breathe:,Buyers and sellers in a market typically do not take account of the external effects of their decisions. Thus, markets work well when the good is ice cream, but they work badly when the good is clean air.

In thinking about the various goods, in the economy, it is useful to group them according to two characteristics:

• Is the good excludable? Can people be prevented from using the good?
• Is the good rival in consumption? Does one person’s use of the good reduce another person’s ability to use it?

Using these two characteristics, Figure 1 divides goods into four categories:

1. Private goods are both excludable and rival in consumption. Consider an ice-cream cone, for example. An ice-cream cone is excludable because it is possible to prevent someone from eating an ice-cream cone you just don’t give it to him. An ice crearn cone is rival in consumption because if one person  eats an ice cream cone, another person cannot eat the same cone. Most goods in the economy are private goods like ice cream cones  You don’t get one unless you pay, and once. you get it, you are the only person who benefits. When we analyzed supply and demand m Chapters 4, 5, and 6 and the efficiency of markets in Chapters 7,8, and 9, we implicitly assumed that goods were both excludable and rival in consumption.

2. Public goods are neither excludable nor rival in consumption. That is, people cannot be prevented from using a public good, and one person’s use of a public good does not reduce another person.

In this chapter, we examine goods that are not excludable: public goods and common resources. Because people cannot be prevented from using these goods, they are available to everyone free of charge. The study of public goods and common resources is closely related to the study of externalities. For both of these types of goods, externalities arise because something of value has no price attached to it. If one person were to provide a public good, such as a tornado siren, other people would be better off. They would receive a benefit without paying for it-a positive externality. Similarly, when one person uses a common resource such as the fish in the ocean; other people are worse off because there are fewer fish to catch. They suffer a loss but are not compensated for it-a negative externality. Because of these external effects, private decisions about consumption and production can lead to an inefficient allocation of resources, and government intervention can potentially raise economic well being.

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