Positional good

In economics, Positional goods are products and services whose value is mostly (if not exclusively) a function of their ranking in desirability, in comparison to substitutes. The extent to which a good's value depends on such a ranking is referred to as its positionality. The term was coined by Fred Hirsch in 1976.^[1]

Positional goods often earn economic rents or quasi-rents. Examples of positional goods include high social status, exclusive real estate, a spot in the freshman class of a prestigious university, a reservation at the "hottest" new restaurant, and fame. The measure of satisfaction derived from a positional good depends on how much one has in relation to everyone else.

Competitions for positional goods are zero-sum games because such goods are inherently scarce, at least in the short run. Attempts to acquire them can only benefit one player at the expense of others. By definition, every person cannot be the most popular, cool, or elite, in the same way that every person cannot be a star athlete – all of those terms imply a separation or superiority over other people.

Land (in the economic sense) is similar to positional goods in that it cannot be created, and land rent arises largely because of a parcel's ranking in desirability against other plots.^[2] However, land is valued for its absolute contribution to productivity, which does not derive from its relative ranking. Thus, some economists (such as Hirsch) include 'land' in positional goods, while others (such as Robert H. Frank) only include goods which are valued specifically because of their relative quality.^[3]

In general, positional goods cannot be created, only redistributed, while material goods can be created with time and effort. However, most goods have both a positional and a material component. Fast cars may be considered to be inherently scarce because one's perception of a car's speed depends on its relation to other vehicles, but there is still an absolute value attached to satisfaction gained from the speed at which a car can travel; it can be considered as having a positional aspect in that only some cars can be the fastest. Because a car is a complex product made of many other materials, some of which (such as steel) are limited in supply and some which (such as leather) are renewable, they may instead be considered Veblen goods.

Positional externalities

Some economists, such as Robert Frank, argue that positional goods create externalities, or a so-called "arms race" for goods that might boost one's social status relative to others. This phenomenon is clearly wasteful; thus, government can improve social welfare by imposing high consumption taxes on certain luxury goods to correct for this externality and mitigate the social waste.

However, simply because the market produces certain goods sub-optimally does not mean that government intervention is warranted. For one thing, government spending is administered by players who might be equally motivated by positional goals. Furthermore, such government actions can potentially impede improvements in living standards and innovation. Technological advance is possible in the first place because wealthy individuals are willing to purchase new and untested goods. There is a certain experimentation and risk that accompany luxury goods, and if they are found to be useful they will eventually be mass produced and made affordable to the common person: one era's luxuries are another's commonplace goods. In short, the negative positional externality is often compensated by the public goods of infant industry effects and research and development.^[4]

See also

• Conspicuous consumption
• Expenditure cascades

References