1.6 - classification of goods and services

Different types of goods and services

1. Free goods 

2. Private (economic) goods

3. Public goods

4. Merit goods

5. Demerit goods

Classification of goods and services chart

Examples of each 4 from the chart

Free goods

goods that are not scarce and have zero opportunity cost.

• No resources (factors of production) are required to produce free goods

• No price is charged for free goods

  • e.g. - wild berries, air we breathe, water from a river

Private goods

goods that are consumed by one person and not available to anyone else.

• They have an opportunity cost since resources must be used to produce them - these resources could have been used to produce something else

• A price is charged for private goods

  • e.g - food items, clothing, petrol

  • ❖ Excludability - it is possible to exclude some people from using a (private) good by charging a price 

    • when it has been purchased by one person, it cannot then be consumed by others

  • ❖ Rivalry - consumption by one person reduces the availability of the good or service for others

Excludability

where it is possible to exclude someone from consuming a good or service

Rivalry

consumption by one person reduces the availability of the good or service for others

Public good

a good that is non-excludable and non-rival.

• ❖ Non-excludable - it is not possible to stop anyone else from using the good

• ❖ Non-rival - consumption by one person does not reduce the consumption of others

  • e.g. - fire services, police force, national security, street lights, flood control systems, lighthouse

  •   A lighthouse:

    • Is non-excludable since no ship in the area can be excluded from benefitting from the service

    • Is non-rivalrous since one ship’s use of the service does not reduce other ships’ use of the service

      • Pure public good - a good which is both non-excludable and non-rival.

Non-excludable

a situation where it is not possible to stop anyone else from using the good

Non-rival

consumption by one person does not reduce the consumption of others

Quasi-public good

a good that has some but not the full characteristics of a public good.

• e.g. - a toll road (club good)

  • Non-rivalrous like a public good

  • Excludable like a private good - since those that do not pay the toll are excluded from using the road

 

The problems caused by public goods

• They may not be provided by the market system - although there is consumer demand for such products. Government will have to intervene and supply them using finance from taxation and borrowing.

• Scarce resources may not be used in the most desirable way

• Free rider problem - people can enjoy the benefits of a public good (e.g. street lights)  without having to pay for it

  • This is due to the non-excludability of public goods

Free rider

someone who does not pay to use a public good

Merit good

a good that is thought to be desirable for consumers but which is underprovided by the market because of information failure.

• e.g. inoculation against a contagious disease - benefits others as they will not catch the disease from the inoculated person

• Governments tend to provide these goods as they are underproduced and underconsumed if left to the market

Demerit good

a good that is thought to be undesirable for consumers and is overprovided by the market because of information failure

• e.g. smoking cigarettes which may cause ill health

• Governments tend to tax these goods as they are overproduced and overconsumed (due to the good being habit-forming)  if left to the market

Information failure

a situation where consumers do not have full or complete information when making decisions.

• They do not realise how good or bad a product is for them

Examples of information failure

• Consumers are not aware of the benefits or harmful effects of a product.

• Persuasive advertising results in consumers having more of a product than is not in their best interests

• Product packaging makes claims that are inaccurate or misleading

• Producers know more about a product than consumers

How can information failure be tackled?

• The internet contains a large amount of information about products - this can help consumers make an informed decision about what to buy

• Better labelling on consumer products such as food and drink can help consumers decide what to buy

• Information about the harmful effects of cigarettes can help stop or limit/increase reluctance of the consumption of such a product

• ❖ The more information available to the consumer, the more likely it is they will make a rational decision that maximises consumer welfare

  • If this happens, the market works efficiently

  • If not, then it results in an inefficient allocation of resources

Other reasons for underconsumption of merit goods and overconsumption of demerit goods

• Low income is another reason for underconsumption of merit goods or overconsumption of demerit goods. Consumers may recognise the benefits of merit goods but lack the disposable income to be able to afford to buy the goods in the quantity they would like or not at all. 

  • e.g. underconsumption of education and healthcare - consumers may be aware of the benefits to themselves and to the economy of having a good education and being healthy, but might not be able to afford these services

• Consumers may choose not to care e.g. overconsumption of ‘junk food’ / e.g. overconsumption of cheap fast-food of low nutritional value and high-sugar drinks - consumers may be ignorant of the harmful effects of such demerit goods, leading to increased obesity

• Some products are addictive e.g. smoking cigarettes

  • Governments often seek to reduce cigarette consumption through indirect taxes, advertising restrictions and health warnings and images on cigarette packs

  • In many countries, governments have banned smoking in public places - this has been more successful