Private goods definition

A private good is purchased for the benefit of the consumer to maximize his or her utility. When a person consumes private goods, he or she pays a price for that and reduces or violates the ability to use those goods by another party. As usual, when a good or service is private, there is competition to acquire and to use it among the consumers. Also, consumption can be controlled by the owner of the private good.

Most of the tangible domestic goods such as automobiles can be categorized as private goods. Because if these goods are purchased by a particular consumer, he or she can consume it. In other words, a consumer can purchase a private good, after compensating to the manufacturer who has produced a private good. So, accessibility for a private good is restricted by the price of that good.

Examples of private goods

Train tickets

Automobiles

Apartments

Lunch at a restaurant

Taxi rides

A cellphone

Characteristics of private goods

According to this description, we can identify two major characteristics of a private good. They are excludability and rivalry. I will describe them as follows.

To read more about the excludability and rivalry, kindly click here.

1. Private goods are excludable

Excludability means ability to restrict the consumption by the producers based on the prices. In other words, producer of a private good can decide how many consumers should buy a particular good and what the purchasing capacity of the customers is. Because based on the price of private good which is set by a producer, whether consumers can buy or cannot buy will be decided. Let’s understand about the excludability using “automobile”. Following is the expected price rates for the different Lamborghini models in Malaysia

Model of the Lamborghini	Price
Lamborghini Urus	Malaysian Ringgit 1 Million
Lamborghini Huracan Evo	Malaysian Ringgit  1.15 Million
Lamborghini Huracan Spyder	Malaysian Ringgit  2.24 Million
Lamborghini Aventador	Malaysian Ringgit  2.27 Million

According to the above information, consumers can buy different models of Lamborghini cars according to their purchasing capability. Only if customers have a budget of Malaysian Ringgit 2.27 Million, they can buy a Lamborghini Aventador. Although customers want to buy a Lamborghini Aventador, they cannot buy a Lamborghini Aventador when they do not have a purchasing power. In other words, sellers exclude buyers using the price. Like this, if customers at least have a budget of Malaysian Ringgit 1 Million, they can buy a Lamborghini Urus model. But there are so many people in the Malaysia who like to buy a Lamborghini. Even though there are Lamborghini cars in the market, majority of customers cannot buy them. Because customers are excluded by producers using the price.

However, since private goods have a price, it can avoid the free rider problem.

2. Private goods are rivalrous

Private goods are in a free-market structure are exclusive to use. So, if one person has purchased it, it reduces the consumption of another person. So, always there is a competition to purchase the private goods. We call it rivalry. When we consider “automobile”, we can explain this condition as follows.

Assume that there is only one automobile in a market to sell. So, when one person purchases it, there are no automobiles to other consumers. Only customer one can consume that automobile and it restricts the consumption of customer two. Like this, since there are a limited number of automobiles in the market and people compete to buy automobiles.  In other words, since the scarcity of private goods, the consumption of one consumer violate the others consumption. Most of the time, two competitors cannot use one private good simultaneously.

What is the difference between excludability and rivalry?

 There is a distinct difference between these two major concepts. Because excludability represent the situation where people cannot consume private goods since they do not have a purchasing power. But rivalry represent the scarcity of private goods, where consumption of one consumer restrict the others’ consumption.

Other than above two major characteristics, we can see another important characteristic of the private goods. That is the externalities. We can discuss it as follows.

3. Private goods generate externalities

Externalities means benefits or costs have occurred to a third party as a result of production or consumption of a good.  In other words, externalities have occurred when private cost and private benefits of a good differ from the social costs and social benefits (Kenton, 2019). Because

Social cost = Private cost + Externalities

Social benefits = Private benefits + Externalities

So there are two types of externalities. They are,

• Positive externalities: Positive externalities mean the externalities which generate benefits to a third party as a result of the consumption and production.
• Negative externalities: Negative externalities mean the externalities which generate costs to a third party as the result of consumption and production.

So, positive externalities should be encouraged and negative externalities should be discouraged. However, both positive and negative externalities represent the market inefficiency situations.

Negative externalities

When we consider “automobiles”, it generates negative externalities in both the consumption and production process. As examples we can say air and water pollution in the manufacturing process of the automobiles, traffic congestion is occurred in the consumption of the vehicles, extra oil consumption as a result of the extra consumption of the vehicles, and so on 

We can present the negative externalities of the automobile consumption as follows.

Negative externalities of consumption are occurred when the consumption of a good or service is harmful for a third party. Here, social benefit will be lower compared with the private benefits. Let’s assume that above graph represent the traffic congestion situation which has occurred as a result of the overconsumption of the automobiles.

Consumption of automobiles can be presented in the Q1 output level. Although here social marginal cost (SMC) equal to private marginal cost (PMC), there is a difference between social marginal benefits (SMB) and private marginal benefits (PMB). That is social marginal benefits (SMB) are less than the private marginal benefits (PMB). That means people overuse automobiles over the socially optimized quantity. Orange colored area represents the dead weight loss as a result of the actual consumption is higher than social optimized consumption. But, when consumption of automobiles has been lowered to point Q2, social marginal benefit (SMB) will be equal to social marginal cost (SMC). In other words, social efficiency will occur.

Positive externalities

As an example for the private good that generate positive externalities, we can say education. Education generates a higher level of positive externalities in consumption.

Positive externalities of consumption are occurred when the consumption of a good or service is beneficial for a third party. Here, social benefits will be higher compared with private benefits. Let’s assume that the following graph represents the shortage of education services.

Consumption of education can be presented in the Q1 output level. Although here social marginal cost (SMC) is equal to private marginal cost (PMC), there is a difference between social marginal benefits (SMB) and private marginal benefits (PMB). That is social marginal benefits (SMB) are higher than the private marginal benefits (PMB). That means people under use education than the socially optimized quantity. The Green colored area represents the dead weight loss as a result of the actual consumption is lower than social optimized consumption. But, when consumption of education increases to point Q2, social marginal benefit (SMB) will be equal to social marginal cost (SMC). In other words, social efficiency will occur.

What are the four types of goods in economics?

There are 4 types of economic goods. They are

1. Private goods

2. Club goods

3. Common goods or common resources

4. Public goods.

You may be interested into read more,

Common resources characteristics, examples, & vs public goods

Private goods definition, characteristics, examples

Public vs private goods: What are the differences?

Public goods characteristics, examples, graph, types, and issues

These four types of goods in economics are categorized based on two major characteristics. They are excludability and rivalry in consumption.

Excludability

Excludability means, the ability to remove the people who haven’t paid for the particular good from using it. In other words, if a person has not paid the price of the good or service, he or she cannot consume it. For consumption, a price must be paid. 

Rivalry

The second characteristic is rivalry in consumption. It means there is competition for the consumption of a particular good. In other words, if one person consumes a particular good, another person cannot consume it. There is a marginal cost of using the goods. For one person’s consumption other person has to sacrifice the consumption.

Let’s, consider about four types of goods in economics based on their major characteristics.