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The Concept of Excludability and Rivalry

Economics has defined two fundamental characteristics of goods: excludability and rivalry. A good is excludable if it is feasible and practical to selectively allow consumers to consume the good. A bad is excludable if it is feasible and practical to selectively allow consumers to avoid consumption of the bad. Household garbage is excludable with the right laws on littering and trespass, it is not excludable without those laws. Another example of nonexcludable goods would be urban air pollution. The two factors which play a major role in excludability are the cost of exclusion and the other is the technology of exclusion and how it changes over time.



The concept of rivalry is slightly subtle than excludability. Rivalry pertains to the manner in which a good is consumed. A bad (good) is rival if one persons consumption of a unit of the bad (good) diminishes the amount of the bad (good) available for others to consume, i.e., there is a negative (positive) social opportunity cost to others associated with consumption. A bad (good) is non-rival otherwise. One way to view the idea of rivalry is through opportunity cost. For e.g., when a person consumes a rival good such as a hamburger he is reducing the number of hamburgers available for others.


Classification of environmental goods on the basis of Excludability and Rivalry

The following figure shows the classification of environmental goods using both the criteria of excludability and Rivalry together. 

  Non Rival  Rival 
Excludable  Water Pollution in small  Household garbage today 
  lakes   
  Indoor air pollution   
Non-Excludable  Noise  Household garbage in the Middle ages
  Green house gases  
      
 

Source: Kolstad 

The degree of rivalry is shown horizontally and the degree of excludability is shown vertically. To the right, bads are rivals and to the left, bads are nonrival. The top represents bads that are excludable and the bottom is reserved for bads that are non excludable.

Bads in the lower left-hand corner of the figure (nonrival, nonexcludable) are termed public bads. Bads in the upper right are termed private bads. There is no particular terminology for the land between these two extremes. The significance is that private goods and bads will typically be provided by the market, and provided efficiently. The market will not provide pure Public bads, primarily because non - exclusion makes it impossible to charge or compensate for use. There exists certain amount of redundancy between rivalry and excludability, despite the fact that they are different concepts. It is difficult to generate examples of nonexcludable rival goods or bads. This is because rivalry involves physical possession and destruction for consumption. If this is possible, it is probably also relatively easy to exclude. 

In a nutshell we can summarize that a good or bad that is both rival and excludable is a Private good or bad and a good or bad that is both non-rival and non-excludable is a public good or bads.

Characteristics of Public good 

This discussion leads to the listing of the characteristics of public goods: A good is said to be a public good if the good is made available to one person in the economy, then it becomes available to everyone else. In other words, if the good is made available to one person, it is not possible to exclude other persons from consuming the same quantity of the same good. Exclusion is not possible.

It is also important to note that a public good is not defined by the nature of the supplier of the good (public authorities or private firm) but by the technical nature of the good. In other words, a private firm can produce a public good. 

Typical examples of public goods are lighthouses and radio signals. If a lighthouse is operational and through the light generated provides direction to a ship, it is not possible to exclude any other boat from using the same light for direction. Similarly, listening to a radio station does not reduce in anyway the possibility for any other individual to listen to the same radio station simultaneously. In many instances, environmental quality also shares this characteristic. For example, when the air becomes cleaner in a specific region, it becomes cleaner for everyone in that region. 

The difficulty with a public good is to get consumers to pay for the provision of such a good. Indeed, given that if the good is provided and it becomes available for everyone, there will a tendency for a consumer not to reveal his/her true willingness to pay for this good. This phenomenon is usually referred to as a free-riding problem. As a result, there is a tendency for such a good to be under-supplied by private producers. 

The Concept of Externality

An externality exists when the consumption or production choices of one person or firm enters the utility or production function of another entity without that entity’s permission or compensation. For example when industrial waste is disposed into a river, it affects the biological organisms in the river and also the quality of water. The industry does not bear the consequence of this pollution but the harmful effects are borne by the river.
 
Externalities arise because of market, policy or institutional failures. Externalities exist when economic transactions between two or more parties result in an impact on a third party, who is not involved in the transaction. In other words, externalities exist when consumers and producers when conducting their consumption and production activities take not all costs or benefits into consideration. A distinction is made between positive externalities and negative externalities. Positive externalities exist when the social benefits associated with a consumption or production activity are larger than the private benefits. This happens when an activity generates external benefits. Negative externalities exist when the social costs of a consumption or production activity are larger than the private costs. This happens when an activity is the source of external costs. Pollution is an obvious example of a negative externality.

Externalities as Public bads 

Having developed the notion of externality and the characteristics of a Public good we can now view externality as a Public bad. An externality involves a good or bad whose level enters the utility functions of several people or firms but is chosen by only one person or firm. This is exactly what happens with a non - rival, non - excludable good or bad – a public good or bad. The notion of externality has risen because of its intuitive appeal. Most externalities can be viewed as a non - excludable good or bad being produced by one agent and being consumed by one or more agents. The producer chooses how much to produce based on his or her own calculus. The consumer has no choice since the good or bad is non - excludable. The fact that a public bad is non - rival means that everyone consumes the same quantity of the public bad. This is equivalent to the amount of consumption being chosen by someone else, the generator of the public bad. This is an externality. Thus there is an intimate connection, and in fact redundancy, between the concepts of public bad and externality.

 

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