Classifying Goods SFLS

Classifying Goods and some Problems

part 1

Question:

Why are markets good at making some things but not other things?

A classical example in textbooks is

called “the light house problem”

In the old days ships at sea needed them, to be prevent from

crashing in a storm.

They can use it for free,

the problem was how do you get

them to pay for it?

Actually this example is bad,

they often did pay, but the lesson is

still true.

Actually this example is bad,

they often did pay, but the lesson is

still true.

Some goods can be used for free, so if

you can’t make someone pay for it, then no one would make it, so then

what?

Classifying Goods and some Problems:1.) Classification and Good

Types3.) Problems of the Non-Excludables2.) Providing Public Goods

Draw this big enough to be able to write a couple of words within each box and on the outside of the box.

Classification and Good Types

Excludable - it is possible to prevent a person from enjoying its benefits.


Excludable


- it is impossible to prevent a person from benefiting from it.

Excludable

Non-excludable


Excludable Non-excludable


- its use by one person decreases the quantity available to someone else.

ExcludableNon-excludable

Rival


Excludable Non-Excludable

Rival


- its use by one person does not decrease the quantity available to someone else.

ExcludableNon-excludableRival

Non-Rival



Rival

Non-Rival



Types2.) Problems of the Non-Excludables

Private goods - A good or service that can be consumed by only one person at a time and only by those people who have bought it or own it.


Private Goods

A private good is both rival and excludable.



Rival

Non-Rival

- A good or service that can be consumed simultaneously by everyone and no one can be excluded from enjoying its benefits.

Private goods

Public goods


Private Goods

Public Goods


Rival

Non-Rival

A public good is both non-rival and non-excludable.


- a firm that produces at lower cost in the market than many more firms can.

(Artificially Scarce goods)(Toll goods)

Private goodsPublic goods

Natural Monopolies


Private Goods

Natural Monopolie

s

Public Goods

A good or service that is both non-rival and excludable is produced by a natural monopoly.



Rival

Non-Rival

- A resource that can be used only once but no one can be prevented from using what is available.

Private goodsPublic goodsNatural Monopolies

Common Resources


Private Goods

Common

Resource

Natural Monopolies

Public Goods

A Common Resource is both rival and non-excludable.



Rival

Non-Rival

Private Goods

Common Resource

Natural Monopolies

Public Goods



Rival

Non-Rival


Types

2.) Problems of the Non-Excludables

Good Types, a little more detail…

Private goods

Common Resource

Natural Monopolie

s

Public goods

Excludable Nonexcludable

Rival

Nonrival

Regular markets supply these best because a price can easy be attached to it.

Private goods can be efficiently produced and consumed in a competitive market that maximizes total surplus.

Private goods

Good Types…a little more detail

Why Markets Can Supply Only Private Goods Efficiently:

-You can stop someone else from using it, so you can make money off of it.


Goods that are Excludable

Goods that are Rivals

Result:

- There is not an infinite 无限 supply of them, so you can make money off of it.


Private goods

Common Resource

Natural Monopolie

s

Public goods


Rival

Nonrival

Natural Monopolies type goods can be efficiently produced and consumed in a market, but since the supply is virtually unlimited only a few companies control the supply.

Like private goods but with very few needed suppliers to produce the efficient amount of goods.

Natural Monopolies






Goods that are Rivals

Result:

- There is not an infinite 无限 supply of them, so you can make money off of it.


Natural Monopolies type goods can be efficiently produced and consumed in a market, but since the supply is virtually unlimited only a few companies control the supply.




Goods that are Non-rivals


- Since there is an infinite supply of these, it is difficult to control and a market with very few suppliers seems “natural”

Result:

Private goods

Common Resource

Natural Monopolie

s

Public goods


Rival

Nonrival

Regular markets supply these best because a price can easy be attached to it.


Private goods


Public goods are in theory unlimited, so it’s hard to put a price on them so markets don’t provide these as much.

Private goods

Common Resource

Natural Monopolie

s

Public goods


Rival

Nonrival

Public goods


Why Markets don’t do a good job with these types:

The good is not produced in the market, even if buyers collectively value the good higher than the cost of providing it. Public Goods have these qualities and therefore governments often have to produce them.


Goods that are Non-excludable

-You can’t stop someone else from using it, so you can’t make money off of it and thus are free to use.


- Since there is an infinite supply of these, it is difficult to control and a market with very few suppliers seems “natural”

Result:


Types3.) Problems of the Non-Excludables2.) Providing Public Goods

-A person who enjoys the benefits of a good or service without paying for it.

Because of the free-rider problem, the market would provide too small a quantity of a public good.

To produce the efficient quantity, government action is required.

Public Goods –The problem that some don’t pay


Free Rider

Common resources have the biggest problem of them all

Private goods

Common Resource

Natural Monopolie

s

Public goods


Rival

Nonrival

Problems of the Non-Excludables

- Since there is a limited supply of these, once they are gone there is no more.

You can’t stop me from consuming the good, and more consumption by me means less of the good available for you.

Why Markets don’t do a good job with these types:

Goods that are Non-excludable

-You can’t stop someone else from using it, so you can’t make money off of it and thus are free to use.


Result:

Problems of the Non-Excludables

Go watch this movie called “The Lorax” it’s

a famous Dr. Seuss children’s book that show the main idea that is the problem.

So to Summarize so far…

Private Goods

Common Resource

Natural Monopolies

Public Goods



Rival

Non-Rival

The end of part 1 Thanks

Education

Classifying Goods SFLS