Markets handle some goods well and others poorly. Two questions, both about the scarce resources from Scarcity and the Factors of Production, sort goods into four kinds.
Key idea
A good is excludable if people who don't pay can be kept from using it. It is rival if one person's use leaves less for others. Private goods are rival and excludable (a sandwich). Club goods are excludable but not rival (a streaming service). Common resources are rival but not excludable (fish in the open ocean). Public goods are neither (national defense).
Why it works
Markets work best for private goods: sellers can charge, and each unit goes to one buyer. Without excludability, people can use a good without paying, so sellers struggle to cover costs (the subject of Public Goods and Free Riders). Without rivalry, keeping someone out wastes something that would cost nothing to share. Common resources get overused, because each user takes what they want and ignores that it leaves less for everyone else.
| Excludable | Nonexcludable | |
|---|---|---|
| Rival | Private good (a sandwich) | Common resource (ocean fish) |
| Nonrival | Club good (a streaming service) | Public good (national defense) |
Worked example: Sort three goods
Classify: (a) a toll road with little traffic; (b) a pond where anyone may fish; (c) a fireworks show seen across town.
- (a) Drivers who don't pay can be stopped (excludable); with little traffic, one more car takes nothing from others (nonrival): a club good.
- (b) No one is kept out, but each fish caught is one fewer for everyone else: a common resource, at risk of being overfished.
- (c) Anyone in town can see it, and one viewer doesn't reduce another's view: a public good.
Answer: (a) club good, (b) common resource, (c) public good.
Common mistake
Calling anything the government provides a public good. A public school can turn students away and has limited seats, so it is excludable and largely rival; governments provide it for other reasons. National defense, by contrast, is both nonrival and nonexcludable. Check: answer the two questions (can nonpayers be kept out? does one person's use leave less?) before naming the type.