AS & A-Level Economics — Goods, Markets and Price Formation

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Original Deckloop economics study material on goods, markets and price formation, with 90 practice cards and 18 concept explainers. Includes worked applications and analytical reasoning.

Economics EN A-Level

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Rivalry and Excludability

In economics, goods are broadly classified based on two fundamental characteristics: rivalry and excludability. It is important to first distinguish an economic good – any good or service that is scarce and thus has an opportunity cost associated with its production and consumption – from these classifications. All goods discussed in this context are economic goods, meaning they are not free goods. A good is rivalrous if its consumption by one person prevents or diminishes its consumption by another. For example, eating an apple means no one else can eat that specific apple. A good is excludable if it is possible to prevent individuals from consuming it if they do not pay for it. For instance, a cinema can exclude non-ticket holders. A private good is specifically defined as a good that is both rivalrous and excludable. These characteristics are crucial for understanding market efficiency and potential market failures, guiding decisions on whether goods can be efficiently provided by the private market or if government intervention might be necessary to ensure optimal resource allocation.

Key points

An economic good is scarce and involves an opportunity cost, distinguishing it from a free good.
Rivalry: One person's consumption reduces availability for others.
Excludability: It is possible to prevent non-payers from consuming the good.
A private good is specifically defined as a good that is both rivalrous and excludable.
These characteristics classify goods into private, public, common pool, and club goods.

Worked example

Question

Consider a subscription-based online streaming service that offers a vast library of films and TV shows. Classify this service based on the characteristics of rivalry and excludability, providing reasoning for each.

Solution

1. Assess rivalry: When one subscriber watches a film, it does not prevent another subscriber from watching the same film simultaneously. The service's capacity is typically large enough that one user's consumption does not diminish another's experience, unless the server capacity is overwhelmed, which is generally not the case for well-managed services.
2. Conclusion on rivalry: The streaming service is non-rivalrous.
3. Assess excludability: The service requires users to create an account and pay a recurring subscription fee. If a user does not pay, their access is immediately revoked. This demonstrates that the provider can effectively prevent non-payers from consuming the service.
4. Conclusion on excludability: The streaming service is excludable.

The subscription-based online streaming service is non-rivalrous because one person watching a show does not diminish another's ability to watch it simultaneously. It is excludable because the provider can easily prevent non-subscribers from accessing the content by requiring payment and account verification.

Common pitfalls

Misconception: Rivalry means competition. Correction: Rivalry refers to the physical property of a good where one's consumption prevents another's, not market competition between firms. For example, two people competing to buy the last concert ticket is competition, but the ticket itself is rivalrous because only one person can use it.
Misconception: If a good is excludable, it means people are excluded. Correction: Excludability means it is possible to prevent non-payers from consuming. Whether exclusion actually occurs depends on the provider's policy (e.g., a private park could charge an entrance fee, making it excludable, even if it chooses not to).

Prerequisites

Deck 02 — Economic Goods and Free Goods: To understand that the classifications of rivalry and excludability apply to economic goods, as explicitly stated in the summary: 'All goods discussed in this context are economic goods, meaning they are not free goods.'