Private Good
Goods bought by an individual to increase his/her satisfaction.
What is a Private Good?
It includes all goods (or services) bought by an individual (or business) to increase his/her satisfaction. Private business owners and firms produce these goods for the consumption of those who acquire them.
All such goods command a price in the market. The price itself is determined by the market forces of demand and supply.
A majority of tangible domestic goods are private or personal goods. The consumption of such goods is limited to the people who pay the required price and buy them. Therefore, these goods are competitive as they can only benefit those consuming them.
Examples include all consumer products like cars, shoes, clothes, smartphones, etc.
Understanding Private Goods
These goods can be traded in the free market, i.e., freely bought and sold at a given price. However, they are also rejectable as multiple substitutes may be available for people.
Since the availability of such goods is often finite, they are considered excludable. This means the producer can limit consumption to a section of people. Usually, this includes paying consumers.
Only people who can afford to buy goods are free to consume them. This excludability can be enforced according to the individuals' purchasing power or willingness to pay.
For example, the high price of luxury products like antiques and vintage cars prevents people from low-income groups from purchasing them.
A consumer buying a particular commodity restricts another from buying the same. This characteristic of a good is called 'rivalry.' All personal goods are rivalrous. This implies that with each additional unit consumed, the amount available for consumption for the following consumer reduces.
Simultaneous consumption of such goods by more than one consumer is not possible. However, transfer of ownership, like in the case of reselling, is possible. Pure private goods are both excludable and rivalrous. Impure private goods can violate either one characteristic.
Examples include cable TV, OTT platforms, and clubs. They are excludable through memberships and subscriptions but non-rivalrous, as one person's use does not diminish the supply available for others.
Private vs. Public Goods
The opposite of a private good is considered a public good. Such goods are free for consumption by all. Purchasing power and affordability do not concern consumers of public goods as they can use the benefits without contributing to the cost.
Unlike private goods, public goods are both non-excludable and non-rivalrous.
No section of consumers can be restricted from using a public good. So, for example, even when a person does not contribute to the cost of a streetlight in his town, he benefits from its use. This makes it a non-excludable commodity.
The availability of public goods does not change with individual consumption. For example, one person's use of a public park does not reduce the availability of parks for all others. This reflects the non-rivalrous nature of public goods.
Examples include - national defense, fire brigade, roads, dams, etc.
We can differentiate goods as public or private on the following parameters:
| Parameters | Private Goods | Public Goods |
|---|---|---|
| Concept | Personal goods are bought to satisfy individual needs or wants. | Public goods or services are provided for the welfare of the people and are generally free for all or highly subsidized. |
| Provided by | Private business owners and firms produce private goods. | Public goods are naturally occurring, like lakes and rivers, or provided by the government or government organizations, like vaccination initiatives and public libraries. |
| Availability | The availability of personal goods diminishes with each consumption. | The availability of public goods is fixed. |
| Quality | However, personal goods quality varies according to the consumer's purchasing power. For example, a high-earning consumer is likelier to have a better house and clothes than a low-income consumer. | The quality of public facilities is fixed and does not vary for consumers. |
| Objective | Private goods are produced to earn profit. | Public goods are produced with the objective of overall growth and development. |
| Open Market | Private goods are often freely bought or sold in the open market. | Public goods cannot be freely bought or sold in the open market as the government provides them according to the needs of society. |
| Excludability | Personal goods are excludable, whereas public goods are not. A pure personal good is also rivalrous. |
Public goods are not excludable. A pure public good is non-rivalrous as well as non-excludable. |
| Opportunity Cost | Personal goods have an opportunity cost them. It implies that when a person buys such goods, he forgoes the right to buy some other commodity as the amount he spends cannot be used for another purpose. | Public goods can benefit non-paying customers and may not always have an opportunity cost. |
Market inefficiencies
Private goods are free from the market inefficiencies caused by the free-rider problem and the tragedy of the commons.
A free-rider problem occurs when individuals enjoy the benefits of a non-excludable public good without paying for its cost.
Even though society may benefit from increased production of a good, the unwillingness to pay for its cost causes underinvestment. Such a problem leads to underproduction.
Private goods limit the free-rider problem by charging a price for the consumption of commodities.
The tragedy of commons occurs when indiscriminate use of a common pool resource leads to the depletion of the resource and creates a situation that adversely affects all consumers.
This happens due to the non-excludable nature of such resources.
Examples include problems of overfishing, overhunting, and overgrazing.
Such a problem does not occur in the case of personal goods due to their excludable nature.
Private Goods and Externalities
Other inefficiencies may arise due to the production and consumption of personal goods when externalities are involved.
Positive externalities
When the production or consumption of goods benefits a third party not directly involved in the transaction, it creates a positive externality.
They express higher value to society than is understood by the producers.
In such cases, the cost of the good does not consider the benefit of the third party.
The cost for the producers or consumers appears higher than the actual.
This causes a problem of underproduction of goods by private markets in case of positive externalities.
For example, education benefits both individuals and society as a whole. However, when people do not take into account the inclusion of the future contributions of a well-educated individual, the costs may seem high.
This leads to lower demand and underproduction.
Negative externalities
When the consumption or production of a good creates a cost for an unrelated third party, it is said to cause a negative externality.
When the producers or consumers do not account for the social cost of the commodity, the costs seem lower than their actual value.
In such cases, private markets tend to overproduce or overconsume.
For example, in the case of water or air pollution caused by industries, if the producer does not compensate for the pollution caused by him, it creates a negative externality. A social cost is borne by people living in the vicinity through healthcare expenses.
The firm continues to produce goods without regulation.
Smoking is an example of a negative consumption externality caused by a personal good. It creates a negative externality in the form of passive smoke for all people in the vicinity of the consumer.
Corrective Measures of Externalities
These market inefficiencies can be resolved through government intervention.
Positive externalities can be resolved by providing subsidies to reduce costs for producers and consumers. A typical example is subsidies for using solar panels to promote environmentally friendly practices.
Negative externalities can be resolved through the use of taxes or regulations.
If consumers are taxed on the consumption of harmful products, their costs increase to reflect the social cost, and their demand reduces.
On the other hand, regulations on the emission of harmful pollutants imposed on the producers or consumers prevent them from overproducing and over-consuming.
Private goods are often considered discriminatory.
Unlike public goods, they cause several issues related to fairness and equity.
Since these goods cannot be acquired by people unable to afford them, they create a trade-off between equity and efficiency.
Moreover, the quality and level of personal goods available to people vary according to their purchasing power. This suggests that the poorest section of society gets low-quality goods.
A typical example is how health insurance, a private good, is often unaffordable to the poor, who are more susceptible to health issues and work-related injuries and lack access to good healthcare facilities.
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