Readers Question: I really wanted know more about private, public, free and merit goods not luxury,normal and inferior goods.that makes absolutely no sense at all. well by the thanks for your answer.
Free Good. A free good is a good needed by society but available with no opportunity cost. It is a good without scarcity. For example, air is a free good, because we can breathe it as much as we want. Water is usually another free good. Though in some countries, water can become scarce – then it is no longer a free good.
- Note: a good may be given away for no charge (e.g. health care is free at the point of use) However, it is not a free good because there is an opportunity cost – health care paid for out of taxes
Public Good – A public good has two characteristics
- Non rivalry – consuming good doesn’t reduce amount available to other people
- Non excludable – once provided you can’t stop anyone consuming it.
Examples include street lights and national defence. Typically they are not provided in free market because firms cannot charge people.
(Note: Goods provided by the public sector (government) are not necessarily public goods. e.g. government provide education, but, education is a merit good not a public good)
Private Good – This is the opposite of a public good. It is a good which has rivalry and excludability. E.g. a bottle of water is sold to one individual who will consume it all. These goods are provided in a free market because a firm can make profit from them.
Merit Good – A good where people underestimate the benefits of consuming. Merit goods usually have positive externalities.
Eg. Education is a merit good. People underestimate benefits of studying and so there is under-consumption.
Note Merit goods may be provided in a free market – but in insufficient quantities.
Inferior, Normal and luxury goods are to do with income elasticity of demand.
- Normal good – occurs when an increase in income leads to an increase in demand
- Inferior good – when an increase in income leads to fall in demand.
- Luxury good – when an increase in income causes a bigger percentage change in demand. YED >1