What it means
Economists define a private good by two features. It is excludable, meaning the owner can keep non-payers from using it, and it is rival, meaning that one person using it leaves less for everyone else.
A sandwich is a good example: once you eat it, nobody else can, and the shop will not hand it over without payment. Because both features hold, a normal market can price the item and supply it profitably.
This matters in business because it explains why private companies are willing to produce certain things. When buyers can be charged and non-buyers excluded, the seller can earn revenue to cover costs, which is why most consumer products are provided by firms and not by governments.
Public goods work the other way. A flood barrier protects everyone nearby whether or not they paid, so companies struggle to charge for it and governments usually provide it.
There are also in-between cases. Club goods, such as a streaming service, are excludable but not rival, and common resources, such as fish stocks, are rival but hard to exclude people from, which is why they tend to be overused.
The classification is not always fixed, and knowing which type of good you sell helps with pricing. A road can be a public good when it is free and uncongested, but it moves closer to a private good when a toll keeps non-payers out, while a club good suits a subscription and a public good usually needs funding from taxes or sponsorship.
In practice
Real-world examples.
Example
A bakery sells a loaf of bread for $4. Once a customer takes it home it cannot be sold to anyone else, and the shop will not release it without payment. The loaf is a clear private good. The bakery sets its price by adding its costs to a margin it believes customers will pay, which is only possible because it can exclude non-payers.
Example
A car dealer sells a new hatchback for $24,000. Only one buyer can own and drive that particular car, and the dealer keeps the keys until payment clears. The sale shows both features of a private good in a single transaction. The dealer can price the car at whatever the market will bear, because there is no way for a non-buyer to enjoy it for free.
Example
A cinema sells numbered seats for $15 each. Only one person can occupy each seat during a showing, and people without a ticket are kept out. If the cinema is full, every extra customer means one less seat available. The cinema can therefore raise prices for popular showings without losing the ability to cover its costs.
Case study
Seen in the real world.
Riverbend Tools is an illustrative, fictional company that makes cordless drills. The product team asked why their business covered its costs easily while the neighbouring town's public park always struggled for funds.
The finance lead explained that a drill is a private good: each unit is sold to one buyer and nobody can use it without paying. The park is open to all, so no one has an incentive to pay for access, which is why the local council funds it from taxes.
In this illustrative story the company used the idea to protect its pricing. It decided against giving away free access to its manuals and instead sold premium support packs, because packs that could be restricted to paying buyers behaved as private goods. The team applied the same test to a free online repair guide, which anyone could read without reducing what was left for others, and decided to pay for it from the advertising budget rather than expect it to earn a return.
Watch out
Common mistakes.
- Assuming any item sold by a private company is a private good, when a streaming subscription is excludable but not rival.
- Confusing private goods with goods that are privately owned, when the economic test is excludability and rivalry.
- Believing free goods cannot be private goods, when a free sample is still rival and excludable because the seller chooses who receives it and each sample can only be consumed once.
Questions
People also ask.
What is the opposite of a private good?
A public good, which is non-excludable and non-rival, such as national defence or a lighthouse.
Why do markets work well for private goods?
Because sellers can charge buyers and keep out non-payers, so prices can reflect cost and demand, and firms have a reason to produce what customers want.
Is a digital download a private good?
Often it is treated as a club good or a private good depending on whether use by one person affects another, so the answer depends on the licence and the platform.
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