Economics Terms A-Z
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There are many different ways that economists classify the different types of goods and services sold in the economy. The characteristics of goods – for instance, whether they are rivalrous or excludable – help economists classify goods into one of four categories. These are club goods, private goods, public goods, and common resources.
Private goods in economics are goods that are both excludable and rivalrous. This means that if one person uses the good, it reduces others’ ability to enjoy the good. And, consumers can be prevented from accessing the good if they don’t pay for it. This is the most common type of good, and often what most people think of when they think about goods in economics.
Private goods include most goods and services that one can purchase: new shoes, a house, a pretzel, a concert ticket, and a beach towel are all examples of pure private goods. When you buy one of these items, you can use it, but others can’t (unless you let them, or they steal it). And, if you don’t pay for them, you’ll be prevented from using them.
Note that the distinction “private good” has to do with the rival and excludable characteristics of the good or service, not the actual ownership or use of the item. If you buy a gift for someone – say a new headset – the headset is still considered a private good, because the gift recipient owns the headset (after you give it to them), multiple people cannot use it, and others can be easily excluded from using it. Likewise, if a family purchases a new microwave or TV, the good is still a private good even if multiple household members might make frequent use of it.
Out of all the four categories of goods determined by rival and excludable characteristics, private goods are the only ones that markets can typically provide efficiently without much – or any – intervention. The cost of private goods is accounted for by the firms that produce them, and consumers buy private goods up to the point where the marginal benefit is equal to the marginal cost.
This results in a combination of producer and consumer surplus that is efficient and maximizes overall welfare. Of course, many things besides characteristics of goods can prevent markets from efficiently providing private goods: monopoly or oligopoly, externalities, government intervention, imperfect information, and more.
However, not every private good is provided by a private corporation. Post offices and mail services are private goods that are often provided by the government. Schools for children are another example. In both cases, private options may additionally be available, but the government typically funds or operates these goods or services for the betterment of the region or country. This is often the case for useful goods or services that have positive externalities (for example, an education) and so may be under-provided by a private market.
Good to Know
The reason that the other types of goods (club goods, common resources, and public goods) cannot be efficiently provided by unregulated markets is that they introduce certain characteristics into the market that prevent efficiency.
For example, public goods and common resources are more commonly subject to externality issues and the free-rider problem. They often require government intervention to induce market participants to provide the socially optimal level.
Club goods, meanwhile, operate by charging consumers a fee to access the goods or services within the club. For example, specific TV shows or movies, gym machines, or courses at a golf club are all specific goods or services that an individual consumer may want to utilize on their own. But, to use them they must purchase a full membership that includes additional goods and services they don’t want.
Private goods, by contrast, are more often goods that do not introduce externalities, don’t suffer from free-rider or public goods problems, don’t introduce other market distortions, and can be efficiently provided by private, profit-seeking corporations. In this case, a perfectly competitive market will produce the socially optimal level of the private good without intervention, just as Adam Smith posited.