Chapter 3: Basic Characteristics of Goods and Services

Overview

The nature of goods and services is investigated in this chapter to determine the role, if any, government should play in the provision of goods with special characteristics. Goods and services may be categorized by their exclusivity and consumability. These definitions enable the classification of goods and services into four broad categories; 1) Private goods, 2) Toll goods, 3) Collective goods and, 4) Common-pool goods. The degree to which a good is excludable and the ability for a good to be consumed individually or jointly, without diminishing the quality of the good, determines each categorical association.

Exclusion

Exclusion refers to the ability of a supplier to limit or deny access to a potential user of a good unless certain conditions are satisfied. Specifically, the buyer and seller must agree on the terms for exchange. Ususally this occurs by exchanging money for the product. Excluding consumers from utilizing the good or service in this case is fairly easy simply raise the price. Exclusion is feasible or infeasible to the degree 'that the cost of enforcing exclusion is relatively low or high" (p. 36). The other case is the classic economic example of a lighthouse. A lighthouse beacon is nearly impossible to make available to only those that pay for it. Thus, it is infeasible to exclude anyone from using the service.

Consumption

Goods and services share another defining characteristic based on the ability of consumers to utilize the product. Some may be consumed jointly and/or simultaneously will others may only be consumed by an individual at a single point in time.

Goods and services may be classified according to the degree to which they possess the two properties of excludability and consumability. The matrix below summarizes the four cases that result when the categories are combined:

• Private Goods
  Private goods are individually consumed and it is relatively easy to exclude consumers from using the product.
• Common-pool Goods
  Common-pool goods are individually consumed but nearly impossible to exclude others from using the good. Air and water are two examples of common-pool goods.
• Toll Goods
  Toll goods are consumed jointly but it is feasible to exclude consumers from their use. A toll bridge is an example of this type of good. Users must pay for the opportunity to cross the bridge. Depending on the price charged for the privilege of using the bridge individuals may be excluded.
• Collective Goods
  Collective goods may be thought of as those goods which are jointly consumed and infeasible to exclude consumption. National defense is the classic example of this type of good. The protection offered by the armed forces is jointly consumed but one person's consumption of this service in no way detracts from the ability of another person to benefit from national security.

Classification of Goods and Services

Why are goods and services classified in this manner? The main reason lies in the provision of these goods and services. Some goods are provided without encouragement. Private goods, especially, are produced to meet demands of consumers without too much concern for market failures. However, collective goods, by their inherent properties pose a serious problem in terms of provision. Because it is nearly impossible to exclude consumers of collective goods, and the fact that they are consumed jointly, leads to a supply dilemma. No individual has an economic incentive to pay for the service and, hence, there may be "free-riders" of the good. Likewise, no producer is willing to supply the good or service. This is the rationale for government intervention in the marketplace.

Discussion

These abstractions are useful for definitional purposes but it should be pointed out that most goods may be classified into more than one category depending on the transformations they undergo. For instance, air is a common-pool good until it is pressurized into a canister. At this point, it becomes a private good. Similarly, private goods may be transformed into collective goods and this poses the greatest problem for society. As the responsibility for providing goods in the marketplace shifts from private suppliers to the collective, the role of government should, theoretically, increase. Savas' point is that this is not happening. Without collective action a continued supply of goods with common-pool and collective good characteristics is jeopardized. Another element of his argument is that more and more goods with private and toll good characteristics are increasingly being deemed worthy and are being treated as collective and common-pool goods. A basic principle arises from this discussion with respect to who should pay for these products: "the smallest collective unit that embraces most of the beneficiaries should provide the collective good" (p. 50). In addition, because it is impossible to charge directly for the use of collective goods, payment is unrelated to demand (p. 49). Thus, a political process of some kind must be employed to answer the questions of how much to provide and which individuals should receive a discount for using the service. In this sense the quantity and quality of the good is subject to the outcome of the political process.

Conclusion

Increasingly, governments are providing goods that are deemed worthy but do not have common-pool or collective characteristics. Indeed, as Savas points out, government growth in the provision of goods with private and toll-good characteristics has surpassed the expenditures for common-pool and collective goods. There are societal costs associated with this trend. When these goods are subsidized, underpriced, or given away the result is overconsumption and waste.