Private good
Encyclopedia
A private good is defined in economics
as "an item that yields positive benefits to people” that is excludable
, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous
, i.e. consumption by one necessarily prevents that of another. A private good, as an economic resource is scarce
, which can cause competition for it.
A private good is the opposite of a public good
, as they are almost exclusively made for profit
. Hence, the market demand curve for a private good is a horizontal summation of individual demand curves. (See example below)
Unlike public goods, private goods are less likely to have the free rider problem
. Assuming a private good is valued positively by everyone, the efficiency of obtaining the good is obstructed by its rivalry, that is simultaneous consumption of a rivalrous good is theoretically impossible; the feasibility of obtaining the good is made difficult by its excludability, that is people have to pay for it to enjoy its benefits..
One of the most common ways of looking at goods in the economy, illustrated in the table below, is by examining the level of competition in obtaining a given good, and the possibility of excluding its consumption; one cannot, for example, prevent another from enjoying a beautiful view, or clean air.
: the price increases when the demand is high but the supply is low. Alternatively, when there is an excess of a product, the price is lowered in order to decrease the surplus and reach a level where the production is more equivalent to the demand.
: bread eaten by a given person cannot be consumed by another (rivalry), and it is easy for a baker to refuse to trade a loaf (exclusive).
To illustrate the horizontal summation characteristic, assume there are only 2 people in this economy and that:
As a result, a new market demand curve can be derived with the following results:
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
as "an item that yields positive benefits to people” that is excludable
Non-excludable good
In economics, a good or service is said to be excludable when it is possible to prevent people who have not paid for it from having access to it, and non-excludable when it is not possible to do so.- Examples :...
, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous
Rivalry (economics)
In economics, rivalry is a characteristic of a good. A good can be placed along a continuum ranging from rivalrous to non-rival. The same characteristic is sometimes referred to as subtractable or non-subtractable . A rival good is a good whose consumption by one consumer prevents simultaneous...
, i.e. consumption by one necessarily prevents that of another. A private good, as an economic resource is scarce
Scarcity
Scarcity is the fundamental economic problem of having humans who have unlimited wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society's goals can be...
, which can cause competition for it.
A private good is the opposite of a public good
Public good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
, as they are almost exclusively made for profit
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
. Hence, the market demand curve for a private good is a horizontal summation of individual demand curves. (See example below)
Unlike public goods, private goods are less likely to have the free rider problem
Free rider problem
In economics, collective bargaining, psychology, and political science, a free rider is someone who consumes a resource without paying for it, or pays less than the full cost. The free rider problem is the question of how to limit free riding...
. Assuming a private good is valued positively by everyone, the efficiency of obtaining the good is obstructed by its rivalry, that is simultaneous consumption of a rivalrous good is theoretically impossible; the feasibility of obtaining the good is made difficult by its excludability, that is people have to pay for it to enjoy its benefits..
One of the most common ways of looking at goods in the economy, illustrated in the table below, is by examining the level of competition in obtaining a given good, and the possibility of excluding its consumption; one cannot, for example, prevent another from enjoying a beautiful view, or clean air.
Pricing
Private goods, like most categories of good, obey the law of demandLaw of demand
In economics, the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases ....
: the price increases when the demand is high but the supply is low. Alternatively, when there is an excess of a product, the price is lowered in order to decrease the surplus and reach a level where the production is more equivalent to the demand.
Example of a private good
An example of the private good is breadBread
Bread is a staple food prepared by cooking a dough of flour and water and often additional ingredients. Doughs are usually baked, but in some cuisines breads are steamed , fried , or baked on an unoiled frying pan . It may be leavened or unleavened...
: bread eaten by a given person cannot be consumed by another (rivalry), and it is easy for a baker to refuse to trade a loaf (exclusive).
To illustrate the horizontal summation characteristic, assume there are only 2 people in this economy and that:
- Person A will purchase: 0 loafs of bread at $4, 1 loaf of bread at $3, 2 loafs of bread at $2, and 3 loafs of bread at $1
- Person B will purchase: 0 loafs of bread at $6, 1 loafs of bread at $5, 2 loafs of bread at $4, 3 loafs of bread at $3, 4 loafs of bread at $2, and 5 loafs of bread at $1
As a result, a new market demand curve can be derived with the following results:
| Price per Loaf of Bread | Loaf of Bread | ||
|---|---|---|---|
| Person A | Person B | Total | |
| $6 | 0 | 0 | 0 |
| $5 | 0 | 1 | 1 |
| $4 | 0 | 2 | 2 |
| $3 | 1 | 3 | 4 |
| $2 | 2 | 4 | 6 |
| $1 | 3 | 5 | 8 |