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Understanding Types of Goods

There are four main types of goods: private goods, public goods, merit goods, and demerit goods. Private goods are excludable and rival, meaning one person's consumption reduces availability for others. Public goods are non-excludable and non-rival, so one person benefiting does not prevent others from also benefiting. Merit goods produce positive externalities and tend to be underprovided in the free market, while demerit goods produce negative externalities and tend to be overconsumed in the free market due to information failures.

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Hoang Minh Hien
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140 views6 pages

Understanding Types of Goods

There are four main types of goods: private goods, public goods, merit goods, and demerit goods. Private goods are excludable and rival, meaning one person's consumption reduces availability for others. Public goods are non-excludable and non-rival, so one person benefiting does not prevent others from also benefiting. Merit goods produce positive externalities and tend to be underprovided in the free market, while demerit goods produce negative externalities and tend to be overconsumed in the free market due to information failures.

Uploaded by

Hoang Minh Hien
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Types of goods

CONTENTS
1. Types of goods
2. Private goods
3. Public goods
4. Merit goods
5. Demerit good
Private goods

Private goods

Private goods are goods bought and consumed by individual consumers or firms for their own benefit.

Examples: food, clothes and textbooks.

Private goods are excludable

It is possible to exclude or prevent some people from using a private good. This is normally done by
charging a price. If the price is not acceptable, then that good will not be consumed. Once one person
has purchased a private good, it cannot be consumed by others.

Private goods are rival

There is rivalry for private goods. The consumption of a private good by one person reduces the
availability for others. For example, when we purchase food, clothes or books then this means that
fewer of these goods are available for purchase by others.

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Public goods
Public goods

A public good is a product that one individual can consume without reducing its availability to others and
from which no one is deprived.

Examples: national defence, sewer systems, and lighthouses.

Public goods are non-excludable

Public goods are non-excludable: once the good has been provided for one consumer, stopping all
other consumers from benefitting from the good is impossible.

Public goods are non-rival.

As more and more people consume the good, the benefit to those already consuming the product
will not be diminished. Streetlights for example.

The free-rider problem

The free-rider problem occurs when it is not possible to exclude other people from consuming a good
that someone has bought.

The free market fails to provide public goods such as defence or street lightning.

This is because they would not be able to supply them for profit due to their characteristics:

non-excludability and
non-rivalry.

This is called the free-rider problem. Because public goods are non-excludable, it is costly or
impossible for one user to prevent others from it.

Example

If I spend money erecting a flood-control dam to protect my house, my neighbours will also be
protected by the dam. I cannot prevent them from enjoying the benefits of my expenditure.

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Merit goods

Merit good

A merit good is defined as a good that is better for a person than the person who may
consume the good realises.

Due to information failure, merit goods tend to be

under-produced and

under-consumed

The government may feel that people consume too little of things that are good for
them: things such as education, preventative health care and sports facilities.

Merit goods produce positive externalities.

The government could either provide them free or subsidise their production.

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Demerit good

Demerit good

Demerit goods, on the other hand, are those products that are worse for the individual
consumer than the individual realises.

Due to information failure, demerit goods tend to be

overproduced and

overconsumed.

For example, when a person makes a decision to smoke, he is not fully in possession
of all of the information concerning the harmful effects of smoking.

Passive smoking can also cause negative externalities.

This causes costs to non-smokers in the form of discomfort and respiratory problems
where there is extensive exposure.

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Private Public
goods goods

Types
of
goods
Demersit
good

Mer
it
good
s

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