4.3.2: Examples of Different Types of Goods

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From the course by University of Pennsylvania

Microeconomics: When Markets Fail

247 ratings

University of Pennsylvania

Microeconomics: When Markets Fail

247 ratings

Perfect markets achieve efficiency: maximizing total surplus generated. But real markets are imperfect. In this course we will explore a set of market imperfections to understand why they fail and to explore possible remedies including as antitrust policy, regulation, government intervention. Examples are taken from everyday life, from goods and services that we all purchase and use. We will apply the theory to current events and policy debates through weekly exercises. These will empower you to be an educated, critical thinker who can understand, analyze and evaluate market outcomes.

From the lesson

Externalities + Public Goods

Two classic cases of market failure will be defined and explored: externalities and public goods. We will define each case, demonstrate why the market fails to provide the efficient outcome and suggest interventions through either marked design or regulation.

4.3.1 Pure Public Goods: Nonexcludable and Nonrival2:38

4.3.2: Examples of Different Types of Goods4:10

4.3.3: Implications of Nonexcludability2:47

4.3.4: Free Riding1:01

4.3.5: Implications of Nonrivalness1:30

Meet the Instructors

Rebecca Stein
Senior Lecturer
Economics

[MUSIC]

So every time we look at a good, we can decide whether or not it's excludable or

nonexcludable whether or not it is rival or nonrival.

And you can see here a table that classifies

various goods in one of these four options.

Up to this point in the course, we've mostly looked at pure private goods.

These are goods that are both rival and excludable.

Food and drink is a great example.

If I buy a dozen eggs, you cannot buy the same dozen eggs,

it is a rival good and it's also easily excludable.

It is easy for a store to say, if you don't buy the eggs, if you don't pay for

them, you don't get to buy them and take them home with you.

So this is a good that is clearly both rival and excludable.

We've also looked a little bit at goods that are nonrival, but excludable.

We've looked at natural monopolies, those goods for which there's a large fixed cost

to producing, but then there's a low marginal cost, and constant

marginal cost for the additional unit to be consumed by the additional person.

An extreme case of this would be a nonrival good where

the marginal cost is zero.

So let's think of a cable show on TV.

To produce that cable show costs a lot of money, probably

hundreds of thousands of dollars, if not a million dollars, to produce this one show.

But once the show is produced,

the extra cost of having one more person watch is, of course, zero.

So a good that is nonrival and excludable is an extreme case of a natural monopoly.

Let's think of goods that are rival and nonexcludable.

My favorite example is fish in the ocean.

The ocean is very big.

A little boat can go in the middle of the ocean and fish,

and it will be difficult to exclude people from going out and fishing there.

Maybe we can exclude people from fishing off our own private deck, but

the ocean as a whole, large parts of it are nonexcludable.

But, of course, fish are rival.

If I fish a fish you cannot fish the same fish.

So fish in the ocean is an example of a good that is rival and

nonexcludable, and we call these sort of goods a common resource.

Because they are common to all of us, we can go ahead and use them and

we cannot be excluded, but there's a cost to our using them.

If we use them, someone else cannot.

And the fourth example, or the fourth case,

is a good that is nonexcludable and nonrival.

And again, the name for this is a pure public good.

The rule of law, or the law, is an example of a nonrival, nonexcludable good.

We write a law, it's easy for us to include everyone in it.

And indeed, the fact that you are subject to the law doesn't make it more costly for

me to be subject to the law.

National defense is another example.

Our country has a national defense system that is nonexcludable,

we defend the country for everyone.

And it is also nonrival, the fact that they're looking after my security doesn't

reduce the probability of them looking after someone else's security.

Or, actually more important, the fact that they're looking after my security

doesn't make it more costly to look after someone else's security.

So again, national defense is an example of a pure public good.

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