Types of Goods & Services (Cambridge International A-Level Economics)

Economic goods and free goods

• Economic goods are scarce in relation to the demand for them

  • E.g. oil, corn, gold, trainers, watches and bicycles

    • Due to the scarcity, they are valuable
    • Due to their value, producers will attempt to supply them in order to make a profit
    • Anything that has a price tag on it is an economic good
    • Producing economic goods has an opportunity cost

• Free goods are abundant in supply

  • E.g. sunlight, the air we breathe, seawater

    • Due to this abundance, it is not possible to make a profit from supplying free goods
    • Drinking water has been a free good for thousands of years, but as the population increases and water sources become more polluted, it has become an economic good
    • Free goods are free from opportunity cost

Private goods and public goods

• A public good is substantially different to a private good

Private goods

• Private goods are goods that firms are able to provide to generate profits

• They can generate profits as these goods are rival and excludable

  • The firm is able to exclude certain customers from purchasing their goods through the price mechanism

    • If customers cannot afford to buy them, then they are excluded

  • Rival goods can only be consumed by a single user

    • Customers can compete for these goods, which are limited in supply and this rivalry helps to generate profits for firms

Public goods

• Public goods are goods that are beneficial to society, e.g streetlights and lighthouses

• They are not provided by private firms due to the principles of non-excludable and non-rivalrous

  • Non-excludable means that anyone can access these resources without having to pay for them. This usually occurs because no one owns the resource (no private ownership), e.g street lighting
  • Non-rivalrous is when one person consuming it does not prevent another person from consuming it. They are finite in supply

• If firms decided to provide these goods anyway, it would give rise to the ‘free rider’ problem

  • This is a situation where customers realise that they can still access the goods, even without paying for them
  • If they are paying, they stop and continue to enjoy the benefits. They are ‘free-riding’ on the backs of other paying customers
  • Over time, any customers who are paying for the goods will stop
  • At some point firms will cease to provide these goods and they will become under-provided in society, resulting in a missing market and a complete market failure
  • Governments usually provide public goods but the quantity provided may be less than the socially optimal level

Quasi-public goods

• Quasi-public goods are non-pure public goods that have characteristics of public goods and private goods

  • They are partially provided by the free market and have elements of non-excludability or non-rivalry
  • Once provided, most people can make use of roads, but roads can be semi-non-excludable through the use of tolls
  • At high levels of demand, consumption by one individual can reduce the benefit to others by limiting the availability of roads due to increased congestion. This makes roads semi-non-rival
  • Public goods are usually funded by governments. Quasi-public goods may be funded by a combination of government revenues and user fees

How public goods take on characteristics of private goods

Merit goods

• A merit good is a good or service that is underconsumed if left to the free market because consumers underestimate the benefits it provides to themselves or others

• Merit goods are often under-provided in a free-market and are a cause of partial market failure

  • Common examples include vaccinations, education and electric cars
  • Governments often have to subsidise these goods in order to lower the price and/or increase the quantity demanded

Exam Hint Ensure that you know the difference between public goods and merit goods. Private firms will not provide pure public goods, so under-provision (or no provision) occurs in society

Private firms will provide some merit goods as they are able to make a profit from them. However, not all members of society will be able to afford these goods. So merit goods are also under-provided

Demerit goods

• A demerit good is a good or service that is overconsumed if left to the free market because consumers underestimate the negative effects it has on themselves or others

• Consumers are unlikely to consider all of the consequences when making consumption decisions

  • The social costs of consumption outweigh the private costs
  • These goods are usually addictive and harmful for consumers, e.g. gambling, alcohol, drugs, sugary foods/drinks
  • Governments often have to regulate these goods in such a way that they raise the prices and/or limit the quantity demanded

• The activities of producers can generate significant external costs, e.g. pollution caused by coal-burning power stations during the production of electricity

  • However, electricity is considered to be a merit good
  • The smoke is a by-product and not a good/service

• For this reason, economists usually consider demerit goods to be goods used in consumption