Chapter 6 : Classification of goods and services

• Private goods are rivalrous and excludable. One example is a chocolate bar.
• Economic goods

  • Benefit society
  • Problem of scarcity
  • Have an opportunity cost
  • Can be traded
• Free goods have no opportunity cost because there is no scarcity of the good. Examples include air and sunlight.
• Positive externality of education

  Higher skilled workforce
• Demerit goods are

  • Associated with negative externalities
  • Usually overprovided
  • Caused by information failure
• Public goods are non-rivalrous and non-excludable. They are available for everyone. One example are street lights.
• A few examples for demerit goods are alcohol and cigarettes.
• Merit goods

  • Education
  • Healthcare
• Public goods are underprovided by the private sector


  Consumers do not see a reason to pay for the good if they still receive the benefit without paying
• Public goods are missing from the free market but offer benefits to society
• Non-excludable nature of public goods


  Gives rise to the free-rider problem
• Negative externality of consuming cigarettes

  Second-hand smoke or passive smoking
• Difficulty in measuring the value consumers get from public goods

  Makes it hard to put a price on the good
• Merit goods

  • Associated with positive externalities
  • Underprovided in a free market
  • Caused by information failure