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A private good is a product that must be purchased to be consumed, and consumption by one individual prevents another individual from consuming it. In other words, a good is considered to be a private good if there is competition between individuals to obtain the good and if consuming the good prevents someone else from consuming it.
Economists refer to private goods as rivalrous and excludable, and can be contrasted with public goods.
- Private goods are those whose ownership is restricted to the group or individual that purchased the good for their own consumption.
- A private good is not shared with anybody else, but can be sold along with transferring rights to use or consume it.
- Private goods are different from public goods, which are available to everyone regardless of income levels.
We encounter private goods every day. Examples include a dinner at a restaurant, a grocery shopping, airplane rides, and cellphones. A private good is thus any item that can only be used or consumed by one party at a time. Many tangible home goods qualify, as they can only be used by those who have access to them. Any item that is effectively destroyed or rendered unusable for its original purpose through use, such as food and toilet paper, are also private goods.
Often, private goods have finite availability, making them excludable in nature by preventing others access to it. For example, only a certain number of a certain pair of designer shoes are produced, so not everyone can have those shoes even if they wish to purchase them. Not only is a single pair seen as a private good, but the entire product line can be classified as such.
The majority of private goods must be purchased for a cost. This cost offsets the fact that the use of the good by one prevents the use of the good by another. Purchasing the item secures the right to consume it and compensates the producer for the costs involved in making it.
A private good is the opposite of a public good. Public goods are generally open for all to use and consumption by one party does not deter another party's ability to use it. It is also not excludable; preventing the use of the good by another is not possible. Many public goods can be consumed at no cost.
Water fountains in public places would qualify as public goods, since they can be used by anyone and there is no reasonable possibility of it becoming fully used up. Public television received over the air and standard AM or FM local radio also qualify, as any number of people can watch of listen to the broadcast without affecting other people's ability to do so.
Private goods are less likely to experience the free rider problem because a private good has to be purchased; it is not readily available for free. A company's goal in producing a private good is to make a profit. Without the incentive created by revenue, a company is unlikely to want to produce the good. Meanwhile, public goods may be subject to the tragedy of the commons problem.
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Marginal utility is the added satisfaction that a consumer gets from having one more unit of a good or service. The concept of marginal utility is used by economists to determine how much of an item consumers are willing to purchase.
Positive marginal utility occurs when the consumption of an additional item increases the total utility. On the other hand, negative marginal utility occurs when the consumption of one more unit decreases the overall utility.
- Marginal utility is the added satisfaction a consumer gets from having one more unit of a good or service.
- The concept of marginal utility is used by economists to determine how much of an item consumers are willing to purchase.
- The law of diminishing marginal utility is often used to justify progressive taxes.
- Marginal utility can be positive, zero, or negative.
Economists use the idea of marginal utility to gauge how satisfaction levels affect consumer decisions. Economists have also identified a concept known as the law of diminishing marginal utility. It describes how the first unit of consumption of a good or service carries more utility than later units.
Although marginal utility tends to decrease with consumption, it may or may not ever reach zero depending on the good consumed.
Marginal utility is useful in explaining how consumers make choices to get the most benefit from their limited budgets. In general, people will continue consuming more of a good as long as the marginal utility is greater than the marginal cost. In an efficient market, the price equals the marginal cost. That is why people keep buying more until the marginal utility of consumption falls to the price of the good.
The law of diminishing marginal utility is often used to justify progressive taxes. The idea is that higher taxes cause less loss of utility for someone with a higher income. In this case, everyone gets diminishing marginal utility from money. Suppose that the government must raise $20,000 from each person to pay for its expenses. If the average income is $60,000 before taxes, then the average person would make $40,000 after taxes and have a reasonable standard of living.
However, asking people making only $20,000 to give it all up to the government would be unfair and demand a far greater sacrifice. That is why poll taxes, which require everyone to pay an equal amount, tend to be unpopular.
Also, a flat tax without individual exemptions that required everyone to pay the same percentage would impact those with less income more because of marginal utility. Someone making $15,000 per year would be taxed into poverty by a 33% tax, while someone making $60,000 would still have about $40,000.
There are multiple kinds of marginal utility. Three of the most common ones are as follows:
Positive marginal utility occurs when having more of an item brings additional happiness. Suppose you like eating a slice of cake, but a second slice would bring you some extra joy. Then, your marginal utility from consuming cake is positive.
Zero marginal utility is what happens when consuming more of an item brings no extra measure of satisfaction. For example, you might feel fairly full after two slices of cake and wouldn't really feel any better after having a third slice. In this case, your marginal utility from eating cake is zero.
Negative marginal utility is where you have too much of an item, so consuming more is actually harmful. For instance, the fourth slice of cake might even make you sick after eating three pieces of cake.
The concept of marginal utility was developed by economists who were attempting to explain the economic reality of price, which they believed was driven by a product's utility. In the 18th century, economist Adam Smith discussed what is known as "the paradox of water and diamonds." This paradox states that water has far less value than diamonds, even though water is vital to human life.
This disparity intrigued economists and philosophers around the world. In the 1870s, three economists—William Stanley Jevons, Carl Menger, and Leon Walras—each independently came to the conclusion that marginal utility was the answer to the water and diamonds paradox. In his book, The Theory of Political Economy, Jevons explained that economic decisions are made based on "final" (marginal) utility rather than total utility.
David has four gallons of milk, then decides to purchase a fifth gallon. Meanwhile, Kevin has six gallons of milk and likewise chooses to buy an additional gallon. David benefits from not having to go to the store again for a few days, so his marginal utility is still positive. On the other hand, Kevin may have purchased more milk than he can reasonably consume, meaning his marginal utility might be zero.
The chief takeaway from this scenario is that the marginal utility of a buyer who acquires more and more of a product steadily declines. Eventually, there is no additional consumer need for the product in many cases. At that point, the marginal utility of the next unit equals zero and consumption ends.