Private Good
A private good is a good that is both rival in consumption and excludable, meaning that one person's consumption reduces the amount available to others and that it is possible to prevent those who do not pay from consuming it. Most goods bought and sold in markets, including food, clothing, and household appliances, are private goods. The characteristics of rivalry and excludability determine whether goods can be provided efficiently by markets or require collective provision, and they define the categories of public goods, club goods, and common resources.
Characteristics
Rivalry means that the consumption of a good by one person reduces the quantity available for others. A meal consumed by one person cannot be consumed by another, and a seat on a bus occupied by one passenger is not available to another. Excludability means that it is feasible to prevent non-payers from consuming the good, typically through the ability to charge a price and to enforce payment, as with a ticket or a purchase.
When both conditions hold, the good is a private good. When neither holds, it is a public good, such as national defence or clean air. When the good is excludable but non-rival, it is a club good, such as a subscription service or a toll road, where access can be restricted but one user's consumption does not reduce another's. When the good is rival but non-excludable, it is a common resource, such as a fishery or a grazing area, where use by one person reduces availability for others but exclusion is difficult.
Market provision
Private goods are typically provided efficiently by markets, because the price mechanism can charge those who consume the good and can exclude non-payers. The revenue from sales provides the incentive for producers to supply the good, and competition drives prices toward cost and output toward the efficient level. The characteristics of private goods therefore make them well suited to market provision.
Market provision is not automatic, however. It requires that property rights be well defined, that contracts be enforceable, and that competition be sufficient to prevent the exercise of market power. Where these conditions fail, private goods may be provided inefficiently, and intervention may be required. The classification of a good as private does not by itself guarantee that the market outcome will be efficient.
Applications
The classification of goods informs the analysis of market failure and the design of policy. Public goods require collective provision, because markets will underprovide them, while common resources require regulation or the assignment of property rights to prevent overuse. Club goods can be provided by markets where exclusion is feasible, but the pricing of access affects the distribution of benefits and the level of use.
The classification is also relevant to the provision of services such as education and health, which have characteristics of both private and public goods. Education is partly rival and excludable, but it also generates benefits for society as a whole, which provides a rationale for public support. The analysis of such mixed cases involves judgment about the extent of the external benefits and about the objectives of policy, and it illustrates that the boundaries between categories are not always sharp.
Rivalry and excludability in practice
The characteristics of rivalry and excludability are matters of degree, and many goods fall between the categories of pure private and pure public goods. A road may be non-rival when traffic is light but become rival when congested, and it may be excludable if a toll can be charged but non-excludable if not. The classification therefore depends on the circumstances, including the level of use and the technology available.
Technology also changes the classification. Encryption and digital rights management make it possible to exclude users from digital content that was previously difficult to restrict, moving goods from the non-excludable to the excludable category. Conversely, technologies that make copying easy can make it difficult to exclude users, moving goods in the opposite direction. The boundaries between categories are therefore not fixed, and the appropriate policy depends on the state of the technology.
Market provision and efficiency
For private goods, market provision is generally efficient, because prices can reflect the marginal cost of supply and can ration the good among those who value it most. The price mechanism conveys information about scarcity and provides the incentive for producers to supply the good. Where competition prevails, the outcome tends toward efficiency, with output at the level at which marginal cost equals marginal benefit.
Efficiency is not assured. Market power, externalities, information problems, and public goods characteristics can all cause the market outcome to diverge from the efficient level. A private good produced by a monopolist is priced above marginal cost and underprovided, and a private good whose production generates pollution is overprovided relative to the social optimum. The classification of a good as private is therefore a starting point for the analysis, not a conclusion about the desirability of market provision.
Mixed goods and collective consumption
Many goods have mixed characteristics. Education and health care are partly private and partly public, since they are consumed individually but generate benefits for society as a whole. Museums, parks, and public transport have elements of both private and public goods, and the appropriate arrangements for their provision depend on the balance of the characteristics and on the objectives of policy.
The analysis of mixed goods informs the design of public policy. Where the benefits are partly external, public support can raise provision toward the efficient level, and where exclusion is feasible, user charges can ration use and raise revenue. The design must balance the objectives of efficiency, equity, and revenue, and the choice among arrangements reflects judgments about the characteristics of the good and the objectives of policy.
Implications for public policy
The classification of goods informs decisions about what should be provided publicly and what privately. The case for public provision is strongest for public goods, which markets underprovide, and for goods with large externalities or with merit good characteristics. The case for market provision is strongest for private goods, where prices can ration use and competition can drive efficiency.
The choice is not binary. Public and private provision can coexist, with public funding and private delivery, or with regulation of private provision to achieve public objectives. Contracting out, vouchers, and public-private partnerships are arrangements that combine elements of both. The design of these arrangements must address the problems of incentives, information, and accountability, and it must be tailored to the characteristics of the good and to the capacity of the institutions involved.