Private Good

A private good is a product or service produced by a privately owned business and purchased to increase the utility, or satisfaction, of the buyer. Most of the goods and services consumed in a market economy are private goods. The prices of these products, such as hamburgers, haircuts, and dental services, are determined to some degree by the market forces of supply and demand. Private goods are both excludable and rivalrous. Excludability means that producers can prevent people from consuming the good or service, based on the consumer's ability or willingness to pay. Rivalrous means that one person's consumption of a product reduces the amount available for consumption by another.

The absence of excludability and rivalry introduces market failures that ensure that some goods and services cannot be efficiently provided by markets. For example, pure public goods are, by nature, nonexcludable and nonrivalrous. The most often cited example of this type of good is national defense. Pure public goods are nonrivalrous because they can be consumed collectively. For example, a nation's army can protect all its citizens at the same time, and one person's consumption does not reduce the amount available to other consumers. At the same time, it is impossible to exclude any consumers from military protection. This nonexcludability leads to a free rider problem, by which consumers get the benefits of the good or service without paying for it. If left to the devices of private markets, pure public goods will be underproduced or not produced at all because it is not profitable to do so.

Inefficiency in the production and consumption of private goods also arises when there are spillover effects, or externalities. A positive externality exists if the production and consumption of a good or service benefits a third party not directly involved in the market transaction. For example, an individual's education provides a direct benefit to him or her and also provides benefits to society as a whole through the provision of more informed and productive citizens. Private markets will underproduce in the presence of positive externalities because the costs of production for the firm are overstated and profits are understated. A negative externality exists when the production or consumption of a product results in a cost to a third party. Air and noise pollution are oft-cited examples of a negative externality. Private markets will overproduce when negative externalities are present because the costs of production for the firm are understated and profits are overstated.

Social and ethical questions regarding private goods arise in connection with these inefficiencies. In the case of pure public goods, the government becomes the producer, and the level of production is determined through a political process. When externalities are present, policy makers must decide how to correct the markets through mechanisms such as public provision of the good (e.g., public education) or rules, fines, taxes, and the assignment of property rights. Common pool resources, such as pastures or oceans, are similar to public goods to the extent that they are nonexcludable. However, since they are rivalrous, individuals may overuse these resources, resulting in the “tragedy of the commons.” A possible solution to overuse is to [Page 1679]introduce private ownership or to assign property rights to grazing lands and fisheries.

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