Basic Characteristics of Goods and Services

1
Basic Characteristics of Goods and Services

• Two Key Properties of Goods and Services
• Classifying Goods and Services
• The nature of the goods in question determines
  whether or not it will be produced at all, and
  the conditions needed to assure that it will be
  supplied. In other words, the nature of the goods
  determine whether or not collective intervention
  is needed to produce the goods in satisfactory
  quantity and quality.

2
Two Key Properties of Goods and Services

• Exclusion
• consumption

3
Exclusion

• whether the potential user of the goods can be
  denied the goods or excluded from their use
  unless he meets the conditions set by the
  potential supplier
• this property is a matter of cost more than
  logic exclusion is feasible or infeasible to the
  extent that the cost of enforcing exclusion is
  relatively low or high.
• Hence, exclusion admits of degree.

4
Consumption

• Whether the goods can be consumed jointly and
  simultaneously by many customers without being
  diminished in quality or quantity OR whether they
  are only available for individual consumption.
• Pure joint-consumption goods and partly joint
  consumption goods

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Four pure types of goods and services

• Private goods pure individually consumed goods
  for which exclusion is completely feasible.
• Toll goods pure jointly consumed goods for which
  exclusion is completely feasible.
• Common-pool goods pure individually consumed
  goods for which exclusion is completely
  infeasible.
• Collective goods pure jointly consumed goods for
  which exclusion is completely infeasible.

6
Private goods

• Pose no conceptual problem of supply
• collective action with respect to private goods
  for the most part is confined to assuring their
  safety, honest reporting, and the like
• private goods supplied by government

7
Common-pool goods

• With no need to pay for such goods, and with no
  means to prevent their consumption, such goods
  will consumed - even squandered - to the point of
  exhaustion, as long as the cost of collecting,
  harvesting, extracting, appropriating, or
  otherwise taking direct possession of the free
  goods does not exceed the value of the goods to
  the consumer.

8
Common-pool goods

• No rational supplier will produce such goods, and
  they would exist only through the beneficence of
  nature
• market mechanisms cannot supply common-pool goods
• the danger of depletion of common-pool goods
• different ways to preserve common-pool goods
  collective action, voluntary agreement, turning
  common-pool goods into private goods

9
Toll goods

• Toll goods can be supplied by the marketplace
• toll goods, natural monopolies, and collective
  action required to regulate their supply
• toll goods supplied by government

10
Collective goods

• Collective action is required for the supply of
  collective goods
• other properties of collective goods hard to
  measure (it is difficult to specify the amount of
  the good to be provided and to estimate what it
  should cost) little choice to the consumer and
  payment for collective goods is unrelated to
  demand or consumption

11
Growth of collective and common-pool goods

• individuals transform their private goods into
  collective goods (e.g. throwing garbage into the
  street instead of subscribing to a
  refuse-collection service), but the reverse is
  also occurring (locks, burglar alarms, club
  houses. New technology also enables collective
  goods to be transformed into toll or private
  goods - e.g. electronic road pricing)

12
Growth of collective and common-pool goods

• The basic nature of some goods has changed,
  either because of changing technology that
  affects their exclusion and consumption
  characteristics or because of changed conditions
  - e.g. urbanization

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Worthy goods

• Private goods that the whole society considers so
  worthy that their consumption should be
  encouraged regardless of the ability of the
  consumers to pay. These worthy goods are
  subsidized by government or produced directly by
  government and supplied to those deemed to
  require consumption or these goods.

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Worthy goods

• Examples of worthy goods education and food
• because private goods are considered worthy,
  exclusion is abandoned, and because the
  consumption of these goods are viewed as
  benefiting every one, they have some
  joint-consumption character
• at the extreme every good has some
  joint-consumption character, because when a
  citizen has an unfulfilled need, he will become
  disaffected from the larger society and this will
  in turn lead to social instability and threatens
  every one

15
Worthy goods and common-pool goods

• Worthy goods are not joint-consumption goods, but
  rather common-pool goods
• when no restriction is imposed, there is
  necessarily a danger of depletion
• private goods and impure toll goods subsidized to
  a significant degree or provided a user charge -
  that is, goods whose exclusion property is
  abandoned - will be treated as common-pool goods,
  subject to all the problems of such goods.

16
Worthy goods and common-pool goods

• Examples of worthy goods as common-pool goods
  medical care
• the logical conclusion is that even if worthy
  goods should be provided, the exclusion principle
  should not be abandoned.

17
Collective goods and collective action

• To provide collective goods, collective action is
  necessary to pay for the goods and thereby to
  make sure that they are produced.
• Collective action is also required to 1) decide
  which private and toll goods are to be defined as
  worthy goods, 2) to decide on the level of
  supply, 3) to pay for them.
• The essence of collective action consists of
  making decisions and raising money.

18
Collective action and government action

• Collective action is not synonymous with
  government action.
• In some cases, collective action can be entirely
  voluntarily and still be effective in providing
  collective goods. But in larger groups,
  organizations have to be created with the
  authority to exercise force to take the money or
  property that is necessary to assure the supply
  of collective goods. Hence, government action is
  required.

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Provision and Production

• Service producer is the agent that actually and
  directly performs the work or delivers the
  service to the customer. It can be a government
  agency, a voluntary association, a private form,
  a nonprofit agency, or the customer him/herself.
• Service arranger is the agent who assigns the
  producer to the consumer, or vice versa, or
  select the producer who will service the
  consumer. The arranger is often a government
  agency, but it needs not be.

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Arranger and collective goods

• Must have the authority to collect revenue to
  support the services.
• Must establish procedures to decide which
  services are to be provided, the level of
  service, and level of expenditures to be made.
• But arranging services does not necessary mean
  government production. The distinction between
  arranging a service and production is at the
  heart of the concept of privatization.

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Alternative delivery arrangements

• Government service
• government vending
• intergovernmental agreement
• contract
• franchise

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Alternative delivery arrangements

• grant
• voucher
• market
• voluntary service
• self-service

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The meaning of privatization

• A dynamic concept
• changing from an arrangement with high government
  involvement to one with less correspondingly, it
  means changing to an arrangement where the
  private sector plays a more dominant role.

24
Privatization activities

• Changing from government to contract, grant,
  voucher, franchise, voluntary, or market
  arrangements
• eliminating grants in favor of voucher,
  voluntary, or market arrangements
• denationalization
• recognizing that a particular government-supplied
  service is a toll or private good and imposing
  user charge
• deregulating franchises and eliminating other
  price controls and entry barriers and allowing
  the market mechanisms to operate

25
Privatization activities

• Privatizing public services that supply
  collective goods contracts, voluntary action,
  and vouchers
• Privatizing nationalized enterprises that supply
  private and toll goods

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Types of goods and delivery arrangements

• Not all types of goods can be supplied by the
  different delivery arrangements
• while almost all arrangements can be used for
  private goods and tool goods, for common-pool and
  collective goods, only a limited number of
  delivery arrangements can be used.

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Factors in evaluating arrangements

• Service specificity
• availability of producers
• capabilities of promoting efficiency and
  effectiveness
• achieving the right economies of scale
• capabilities of relating costs to benefits
• responsiveness to consumer

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Factors in evaluating arrangements

• Susceptibility to fraud
• facilitating redistribution
• responsiveness to government direction
• Limit government growth

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Contracting

• Only feasible when the following conditions are
  met
• the work to be done is specified unambiguously
• several potential producers are available
• the government is able to monitor the
  contractors performance

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The case for contracting

• More efficient
• allowing government to take advantage of more
  specialized skills that are lacking in its own
  force
• more flexible
• reduce dependence on a single supplier

31
The case against contracting

• More expensive
• limits the flexibility of government to respond
  to emergencies
• specific contracts are difficult to draw up
• undesirable dependence on contractors

32
Conditions for a voucher system to work best

• Widespread differences in peoples preferences
  for the services
• individuals have incentives to shop aggressively
  for the service
• individuals are well informed about the market
  conditions
• availability of many competing suppliers
• the quality of the service is easily determined
  by the user
• the service is relatively inexpensive and
  purchased frequently

33
Voucher system and cost control

• People have limited incentive to consume food and
  shelter, but have unlimited capacity to consume
  money
• it is easier to control welfare costs for food
  and shelter than it is to control the cost of
  unrestricted welfare payments.
• In-kind programs are not attractive to the
  non-poor, but cash payments are.
• Welfare payments are also more amenable to
  political pressure, and this will also lead to
  inflation of welfare cost