Goods and Bads
From Thermal-FluidsPedia
“Goods” are anything that people desire, and by extension “bads” can be defined as all that they do not wish to have. Examples of goods are houses, cars, food, and energy. Examples of bads are pollution and noise. Garbage could be considered a good or a bad depending on whether we have to pay to get rid of our garbage, or if we are being paid by incinerator companies who burn it to produce electricity. Plastic bags can be considered to be goods when they are used to carry groceries but as bads when they no longer have any useful function and must be disposed of.
The goods that can be sold in a market or traded in a barter economy in exchange for other services and products are called market goods. Non-market goods are goods that are available to all without charge. Examples of market goods are televisions, hamburgers, oil, electricity, and in some instances even pollution. Air and water are prime examples of non-market goods.
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Private and Public Goods
Private goods are goods whose consumption or use by one consumer precludes its consumption or use by someone else. For example, a car sold to you is only for your own use (or your family and friends if you wish). The gasoline that you put in your car cannot be used by any other car except yours. Private goods are usually exclusionary. Watching a movie in a movie theatre or riding a train requires buying a ticket, so those who do not have tickets can be excluded from watching the movie or riding the train.
Public goods are goods in common -- they can be used simultaneously by many individuals. Furthermore, once these goods are produced, they cannot be exclusionary, either by law or because of prohibitively high cost. Examples include the use of park services, police protection, roads, schools, and courts. The use of a public good by one person does not exclude others from using and benefiting from it as well. One person enjoying park facilities does not prevent others from enjoying the same park. Unless it is overcrowded, the use of the university library by one student does not diminish its use to others, so there is no rivalry between students over library resources.
Without exclusion, private firms have little or no incentives to provide public goods. To make a profit private firms require users to pay a fee for their products or services. For example, although TV broadcasting is a public good, cable companies can exclude non-subscribers and make a profit. For this reason, public goods are often provided by the government, which levies mandatory taxes on everyone. In certain instances, the government may hire private contractors to deliver public goods and pay them by issuing bonds or from general funds.
Two problems often associated with public goods are free riding and open access. Free riding is a problem when each consumer of a public good is inclined to consume the good without sharing its cost of production – to free ride on the investment of others. Open access refers to overexploitation of natural resources to the benefit of each consumer at the expense of the community benefit. For example, consider the decision to hire a pool man to maintain the community pool. If contributions are totally voluntary, each neighbor may not contribute their fair share, hoping to free ride on the contribution of others. As a result enough funds may not be collected. In another scenario, individual homeowners may not be as careful in keeping the community pool clean as they would have if they were the only one who used the pool. One way to correct the free riding and open access problems is to impose regulations and levy fees to each member of the community who may benefit from the public good.
Question: Is electricity a public or a private good?
Answer: Strictly speaking, electricity is a private good as it is non-rival and exclusionary. Electricity is, however, an essential part of our daily life and as such is consumed by the public at large. It may therefore be argued by some that electricity should not be treated in the same fashion as other private goods. That’s to say, as a matter of economic justice or fairness, electricity must be regulated or subsidized (offered at lower prices) to low income customers.
In the United States and many capitalist countries, however, electricity has been subjected to the general laws of supply and demand and treated similarly to other conventional private goods. Because electricity generation is capital intensive, only a few firms control the electricity market. In economic terms, a production system that is controlled by limited producers is called an oligopoly. The problem with an oligopoly is that these firms can theoretically collude to fix prices, forcing smaller firms out of competition and thus in effect, becoming a single unregulated monopoly firm. When energy was deregulated in the United States, proponents cited “deregulation” as a measure intended to increase competition. In reality, as we saw in Electricity, deregulation of electricity resulted in major collusions among big energy firms who raised prices to unprecedented levels. Because the public required the service, they had no choice but to accept the highly inflated prices.
Example: In the absence of any regulatory pressure, John is dumping his garbage (a private bad) in a vacant lot adjacent to his house. Two neighbors, Sue and Bob, are particularly upset and are even willing to pay for the cost of hauling John’s garbage, which is $10 a month. Sue is willing to pay $7 toward the effort; Bob has volunteered to pay $5. Would enough money be collected to clean up John’s garbage?
Solution: Not necessarily! Knowing Bob’s willingness to pay $5, Sue may conclude that $5 is all she needs to contribute toward the effort. By the same logic, Bob will volunteer to pay only $3, for a total of $8. As a result, each tries to free ride off the desperation of the other and not enough money is collected.
Demand curves for public and private goods
Depending on whether a good is private or public, its demand curves look different. In a market for a private good, a single price is offered, each buyer buys as many goods as desired, and total demand is simply the sum of the individual demands. For example, consider the total cigarette demand of two smokers, Mary (a regular smoker) and John (a casual smoker). Since cigarettes used by Mary cannot be used by John and vice versa, the total cigarette demand is the horizontal sum of the demand curves of John and Mary.
Unlike private goods, public goods must be shared by many customers. In this case, the demand curve is the vertical sum of the demand curves of individual customers. For example, the inhabitants of two nearby cities, A and B, may be willing to pay different taxes for developing a beachfront. The residents of city A, being farther away from beach or because of their lower median income, are willing to pay less than the more affluent residents of city B, which is also closer to the beach. Demand curves for these two cities per meter of beachfront are denoted by Da and Db. If the beach is willing to accommodate both cities, then total demand is found by adding the two demands vertically. That is, if the residents of city A are willing to pay $150 in taxes for developing 3 kilometers of beachfront and residents of city B are willing to pay only $80, then the total demand for 3 kilometers of beachfront is $230. Figure 1 shows the total demand for private and public goods.
References
(1) Toossi Reza, "Energy and the Environment:Sources, technologies, and impacts", Verve Publishers, 2005
Further Reading
Colander, D. C., Economics, 3rd E., Irwin-McGraw-Hill, 1998.
Bosselman, F., Energy, Economics and the Environment, Second Edition, Foundation Press, 2005.
Energy Economics, Science Direct Elsevier Publishing Company. Publishes research papers concerned with the economic and econometric modeling and analysis of energy systems and issues.
External Links
United States Association for Energy Economics (http://www.usaee.org).
International Monetary Fund (http://www.imf.org).
The World Bank (http://www.worldbank.com).