Classification of goods and services
Free and economic goods
- a free good has no opportunity cost — unlimited supply, no price (air, sunlight).
- an economic (private) good is scarce, so it has an opportunity cost and a price.
- A private good has rivalry (if I eat it, you can't) and excludability (pay or you can't use it).
Practice
A free good (like air) is one that:
A free good has unlimited supply, so no opportunity cost and no price.
Public goods
- A public good has:
- non-rivalry — one person using it doesn't reduce it for others,
- non-excludability — you can't stop non-payers using it.
- This causes the free-rider problem, so firms won't supply it — the government must (street lighting, defence).
Practice
Public goods are not provided by private firms because of:
Non-excludability lets people free-ride, so firms can't profit — the government must provide them.
Merit and demerit goods
- a merit good is better for you than you realise → people buy too little (education, health care).
- a demerit good is worse than you realise → people buy too much (cigarettes, alcohol).
Practice
A merit good is one that people tend to:
Merit goods (education, health) are under-consumed; demerit goods (cigarettes) are over-consumed.
You've got it
Key idea
- free good = no opportunity cost; private good = scarce, with rivalry + excludability
- public good = non-rivalry + non-excludability → free-rider problem → government provides
- merit goods are under-consumed; demerit goods are over-consumed