Classification of goods and services

Economics AS · Basic economic ideas and resource allocation. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

A free good is not scarce, so using it has no opportunity cost. Sunlight and air are examples. A good given away at zero price by a government or a firm is not a free good, because resources were used to make it.

Most goods are private goods: rival and excludable. Public goods are non-rival and non-excludable. People can use them without paying (free riding), so private firms cannot charge for them and the market fails to provide them.

Merit goods are under-consumed because people have imperfect information and underestimate the benefits. Demerit goods are over-consumed because people underestimate the harm. Both can be sold in a market, so they are not public goods.

Rules to remember

Free good: no opportunity cost; supply is enough to meet all wants at zero price.
Economic (private) good: scarce, so it has an opportunity cost.
Rival: one person's use reduces the amount available to others. Excludable: people who do not pay can be prevented from using it.
Public good: non-rival and non-excludable, for example national defence, street lighting, flood defences.
Free rider: someone who benefits from a good without paying for it.
Merit good: under-consumed in a free market because of imperfect information, for example education, health care.
Demerit good: over-consumed in a free market because of imperfect information, for example cigarettes, alcohol.

Common mistake

Students call anything the government provides a public good. A good is public only if it is non-rival and non-excludable; state schools and hospitals are merit goods.

Worked example

A government gives free measles vaccinations to all children. Is a vaccination a public good or a merit good?

Test rivalry: a dose given to one child cannot be given to another, so it is rival.
Test excludability: a clinic can refuse anyone who does not pay, so it is excludable.
It is rival and excludable, so it is a private good by nature, not a public good.
If parents had to pay, many would underestimate the benefits and buy too little, so it would be under-consumed.

Answer: It is a merit good. Being free and state-provided does not make it a public good.

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