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Private Good

An item whose ownership is limited to the person that acquired that product for their own consumption

What is a Private Good?

A private good is an item that is purchased for the benefit or utility of the buyer. When a person consumes the private good, he/she restricts another party from using it. Generally, a good is expressed as private if there is a rivalry between individuals trying to acquire it and consumption is controlled by one rightful owner. Therefore, private goods differ from public goods in terms of availability since public goods are freely accessible to everyone.

 

Private Good

 

The majority of tangible domestic produced goods are categorized as private; they can only be consumed by individuals who have purchased and own them. By acquiring a private good and compensating the manufacturer who incurs costs to create the product, the buyer then has the right to consume it. This makes private goods exclusive due to their finite accessibility.

 

Summary

  • Private goods refer to items whose ownership is limited to the person that acquired that product for their own consumption.
  • Purchase of the private good allows use by one party and restricts the use by another party.
  • Private goods are not sharable but can be sold with the transferring usage rights for use or consumption.

 

Understanding Private Goods

Private goods make up the majority of goods and services consumed in the market. However, pure private goods exhibit excludability and are rivalrous in nature. Excludability means that producers can restrict a section of a population from consuming it based on their purchasing power. In contrast, rivalrous means that the consumption of an item by a consumer excludes its availability for utilization by other consumers.

In a private market setup, individuals must pay compensation for the good to enjoy its benefits. This eliminates the free-rider problem since the ease of accessing the good is prevented by competitiveness, which obstructs simultaneous consumption.

Goods in the economic market are determined by analyzing the intensity of competition in acquiring a specific good or service and its possible consumption exclusivity. For example, a car driven by a person cannot be utilized by another – this is a rivalry. The manufacturer can also decline to sell the car for a low price, which is exclusiveness.

 

Private Goods vs. Public Goods

Private goods are consumed at a cost since the producer aims to make a profit. The incentive realized acts as a motivation, and without it, the company will be unwilling to create the good. The excludability in private goods allows the seller to earn an income and exercise ownership rights. For example, the producer may exclude individuals without a membership subscription to a private gym.

However, public goods are generally available for consumption by everyone. They are non-exclusive; hence usage by one consumer does not limit another. Unlike private goods, most public goods experience free-rider problems since they are freely consumed. The absence of controlled regulation allows individuals to consume unlimited quantities of resources. Such products must be provided for by a public agent either through a shared resource or taxpayer funds.

 

Private Goods and Externalities

Externalities may cause inefficient consumption and production of private goods. The following spillover effects represent externalities affecting other sectors of the economy.

 

Positive Externality

A positive externality arises when an individual, who is not a participant in the market transaction, benefits from consuming and producing a private good or service. Products identifying with positive externalities express higher value to the society than expected by the producers.

For example, education directly benefits a person and empowers society at large by providing productive individuals. However, although the individuals are a benefit to society, society does not have to directly pay for it.

 

Negative Externality

A negative externality happens when a third party suffers a cost related to either consumption or production of a private good. For example, environmental pollution caused by industrial activities directly impacts society, which pays the healthcare costs resulting from air and water pollution-induced complications.

Generally, producers do not compensate society for the cost they create in the process. Therefore, the existence of negative externalities may cause private markets to overproduce since the costs of production are understated, and the total profits are overstated.

 

Corrective Measures of Externalities

Policymakers may correct the cost/benefit inefficiency created by specific environmental products in the private economy by applying regulatory controls. They may provide compensation to consumers or help producers to develop a more efficient environmental standard for emissions. The following is a type of externality corrective measure employed by market regulators.

 

Command and control

Command and control is a type of environmental control regulation that policymakers use to regulate the process and measures that a company must apply to ensure environmental quality. Industries are thereby compelled to reduce emissions during production. This strategy of environmental control also allows policymakers to identify non-compliant producers by regulating the market.

 

More Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Externality of Production
  • Marginal Propensity to Consume
  • Environmental Economics
  • Normal Goods

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