Anthony J. Pennings, PhD

WRITINGS ON DIGITAL STRATEGIES, ICT ECONOMICS, AND GLOBAL COMMUNICATIONS

Characteristics of Economic Goods and their Social Implications

Posted on | January 20, 2018 | No Comments

In a previous post, I wrote about how media products can be considered “misbehaving economic goods” because most don’t conform to the standard product that is individually owned and consumed in its entirety. Economics is mainly based on the assumption that when a good or service is consumed, it is used up wholly by its one owner. But not all goods and services fit this standard model.

Media products like a cinema showing or a television program have different characteristics. They are not consumed by an individual owner, and it may be difficult to restrict non-paying users/viewer/consumers from enjoying them. Cinemas can project one movie to large groups because it is not diminished by any one viewer although it need walls and security to keep non-payers out. TV and radio began by broadcasting a signal out to a large population. Anyone with a receiver could enjoy the broadcast. Cable distribution and encryption techniques allowed more channels and the ability to to monetize more households. These variations raise a number of questions about the ownership and consumption of different types of products and their economic analysis.

The characteristics of goods and services also raises questions about how society should organize itself to offer these different types of economic products. Media products and services have required a fair amount of government regulation and sometimes government ownership of key resources. Some goods, like fish, are mainly harvested from resources like lakes, rivers, and oceans that prosper if they are protected, and access restricted from overuse or pollution.

In this post, I will outline four categories of economic goods that need to be considered in today’s digital age with its global economy and changing social systems of governance. The major issues are 1) the degree of consumption or “subtractibility” and 2) whether non-paying consumers can be excluded from their consumption. Media products tend to be non-rivalous and non-excludable and are generally considered to be either “club goods” or “public goods.” Consequently, they are a useful point of departure to talk about other types of goods.

Private Goods

The standard category for economic goods is private goods. Private goods are rivalrous and excludable. A person eating an apple consumes that particular fruit, and it is not available for rivals to eat. Yes, an apple can be cut up and shared, but it is ultimately “subtracted” from the economy. Having lived in apple country, I know you can enter an orchard and steal some fruit. Economists like to use the term households, partially because many products, such as a refrigerator or a car, are shared among a small group of people. Other examples of private goods include food items like ice cream, clothing, and durable goods like a television set.

Common Goods

Common goods are rivalrous but non-excludable. This means that they can be subtracted from the economy, but it may be difficult to exclude others from non-payment. Fishing results in catches that are consumed as sashimi or other fish fillets, but the lakes, rivers, and oceans make it difficult to exclude fishing activities. Similarly, groundwater can be drilled and piped to the surface, but it is difficult to keep others from consuming from the same source. Public libraries loan out books making them unavailable to others. Table space and comfortable chairs at libraries can also be taken up, although it is difficult to exclude people from them.

Club Goods

Club goods are non-rivalrous and excludable. In other words, they cannot be consumed with usage, and it is possible to exclude consumers who do not pay. A movie theater can exclude people from attending the movie, but the film is not consumed by the audiences. The audience doesn’t compete for the cinematic experience; it shares the experience. That is why they are often called “collective goods.” These goods are usually made artificially scarce to help produce revenue.

Software is cheaply reproduced and not consumed by a user. However, the history of this product is wrought with the challenges of making it excludable. IBM did not try to monetize software and focused on selling large mainframes and “support” that included the software. But Micro-Soft (Its original spelling) made excludability a major concern and developed several systems used to protect software use from non-licensees. It only recently moved to a more “freemium” model with Windows 10. This strategy takes advantage of network effects and makes sure it gets out to a maximum amount of people.

Public Goods

The other category to consider are those products that are not subtracted from the economy when consumed and whose characteristics make it difficult to exclude nonpaying customers. Broadcast television shows or radio programs transmitted by electromagnetic waves were early examples. Carrying media content to whoever could receive the signals, the television broadcasts were not consumed by any one receiver. It was also difficult to exclude anyone who had the right equipment from enjoying the programs.

The technological exploitation of radio waves presented challenges for monetization and profitability. While some countries like Britain and New Zealand charged a fee on a device for a “licence” to receive content, advertising became an important source of income for broadcasters. It had been pioneered by broadsheets and newspapers as well as billboards and other types of public displays. As radio receivers became popular during the 1920s, it became feasible to advertise on its signals. In 1922, WEAF, a New York-based radio station charged US$50 for a ten-minute “toll broadcast” about the merits of a Jackson Heights apartment complex. These later became known as commercials and were adopted by television as well.

Cable television delivered programming that was also not rivalrous but developed techniques to exclude non-paying viewers. They broadcast content to paying subscribers via radio frequency (RF) signals transmitted through coaxial cables, or light pulses emitted within fiber-optic cables. Set-top boxes are needed de-scramble and decode cable channels allow subscribers to view a single channel. Unfortunately, this has led to monopoly privileges and has resulted in many viewers “cutting the cord” to cable TV.

Generally recognized public goods also include firework displays, flood defenses, sanitation collection infrastructure, sewage treatment plants, national defense, radio frequencies, Global Positioning Satellites (GPS) and crime control.

Anti-Rival Goods

What happens when a product actually becomes more valuable when it is used? It is possible that an economic good not only be not be subtracted but increase in value when it is used, and increases its value when used by more people. A text application has no value by itself, but as more people join the service, it becomes more valuable. This is an established principle called network effects.

Merit Goods.

Merit goods are goods and services that society deems valuable and the market system does not readily supply. Healthcare and education, child care, public libraries, public spaces, school meals are examples. Merit goods can generate positive externalities that circulate as positive effects on society. Knowledge creates positive externalities, it spills over to some who were not involved in its creation or consumption.

These are not necessarily all public goods. While medical knowledge is becoming more readily available, a surgeon can operate on a person’s heart, and her resources are not available to others. Hospital beds are limited and medical drugs and subtracted when used. An emerging issue is medical knowledge produced through data science techniques. The notion of public goods is increasingly being used to guide policy development around clinical data.

Economic Goods and Social Policy

Market theory is based a standard model where products are brought to market and are bought and consumed by an individual buyer, whether an individual or a more corporate environment. But as mentioned in a previous post, some products are misbehaving economic goods. A variety of goods do not fit this economic model and as a result present a number of problems for economic theory, technological innovation, and public policy.

Much political debate about economic issues quickly divides between free-market philosophies that champion enterprise and market solutions on the one hand, and economic management by government on the other. The former may be best for private goods, but other goods and services may require alternative solutions to balance production and social concerns. Much of the US technological development was ushered in during the New Deal which recognized the role of public utilities in offering goods like electricity, telecommunications, and clean water for sanitation and drinking. The move to deregulation that started in the 1970s quickly became more ideological rather than practical. Digital technologies emerged within market philosophies, but practical questions have challenged the pure free enterprise orthodoxy.

Summary

Media products are misbehaving economic goods in that they do not fit the standard model of a market with products that are consumed by an individual consumer. Modern economics is largely based on the idea that goods are primarily private goods. But as we move towards a society based more on information and digital processes, we need to examine the characteristics of the goods and services we value. We need to design systems of production and distribution around their characteristics.

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AnthonybwAnthony J. Pennings, PhD is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College in New York, and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.

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    Professor and Associate Chair at State University of New York (SUNY) Korea. Recently taught at Hannam University in Daejeon, South Korea. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, media economics, and strategic communications.

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