Definition and explanation of different types of goods
- Free good – no opportunity cost
- Private – Good with opportunity cost, rivalry and excludable
- Public good – non-rivalry, non-excludable
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. By breathing, we do not diminish the available resource for other people.
Water is usually another free good. If you live by a river, you can take water without reducing the amount available to others. Though in some areas, water can become scarce in drought conditions – then water is no longer a free good.
- Note: a good may be given away for no charge (e.g. healthcare is free at the point of use) However, it is not a free good because there is an opportunity cost – in this case, healthcare is paid for out of taxes.
This is a good which has rivalry and excludability. E.g. If you sell a bottle of Coca-Cola to one individual – others cannot consume it.
- Also, private goods have an opportunity cost, if we use resources to produce a bottle of Coca-Cola, we cannot use that glass, sugar and water to produce other goods.
- These goods are provided in a free market when a firm can make a profit from them.
A public good has two characteristics:
- Non-rivalry – consuming the good doesn’t reduce the amount available to other people.
- Non-excludable – once provided you can’t stop anyone consuming it.
Examples of public goods include street lights, law and order and national defence.
- Typically, public goods are not provided in a free market because firms cannot charge people directly and there is scope for ‘free-riding on other people paying for it.
- 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)
- This is a good where people underestimate the benefits of consuming. This may be due to poor information or overvaluing present happiness (e.g. going to party rather than studying.
- Merit goods usually have positive externalities; for example, with education, if people gain qualifications – they can earn a higher salary, but the whole economy benefits from their skills.
- 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.
- A demerit good is a good where people may be unaware of the costs or choose to ignore them. For example, people may over-consume alcohol or get addicted to cigarettes – even though this will damage their health.
- It requires a subjective opinion that people make ‘wrong’ choices. Some may see gambling as an example of a demerit good because it can lead to gambling addiction. Others may see it as ‘harmless fun’
- Demerit goods often have negative externalities as well. If you smoke it gives passive smoking to others.
Normal, inferior and luxury goods
Inferior, normal and luxury goods are to do with the income elasticity of demand.
- Normal good – occurs when an increase in income leads to an increase in demand. Normal goods will have a positive YED.
- Inferior good – when an increase in income leads to a fall in demand. It will have a negative YED (YED<0)
- Luxury good – when an increase in income causes a bigger percentage change in demand. YED >1