classification of goods and services chapter6 Flashcards
three groups that economists classify goods and services into
A small number of goods and services that are free for everyone to use.
Goods and services that individuals have to pay for
through the market mechanism.
Goods and services that are provided for everyone by
the government.
excludability
where it is possible to stop someone from consuming a good or service.
rivalry
where consumption by one person of a good or service reduces the availability of the good or service for others.
non rivalry
where consumption by one person does not reduce consumption by someone else.
Private goods (economic goods)
goods that are consumed by one person and not anyone else. the fundamental economic problem of scarce resources in relation to unlimited wants only arises in situations where economists are dealing with private goods. a price must be charged when private goods are consumed because they have a cost in terms of resources and are scarce.
excludability and private goods
price makes the good excludable. if the price is not acceptable then the good cannot be consumed. once a private good has been purchased by a person, it cannot then be consumed by another person
Rivalry and private goods
the consumption by one person reduces the availability for others.
free goods
they have zero opportunity cost since consumption is not limited by scarcity. no factors of production are needed to produce them.
Public goods
good that is non excludable and non rival
non excludable
a situation where it is not possible to stop anyone else from using a good
pure public goods
good which is both non excludable and non rival
quasi public goods
good that has some but not the full characteristics of a public good
free rider
someone who does not pay to use a public good because of the excludability of it
problem caused by public goods
there may be a consumer demand for such products, but the free market may not have a mechanism for guaranteeing production. existence of public goods may not mean that scarce resources are not used in a way that would be desirable. People may wish for the provision of such goods, but the demand may never be registered in the market. However, private goods can be rejected if the price is too high or the quality is not what is expected. These seemingly obvious qualities of private goods are useful since they help us understand what is meant by public goods.
merit goods
a good that is thought to be desirable for consumers but which is underprovided by the market because of information failure. governments tend to provide merit goods, sine there is likely to be underproduction
demerit goods
a good that is thought to be undesirable for consumers and is overprovided by the market because of information failure. there is likely to be overproduction and overconsumption, largely because these are goods that are habit-forming, fairly cheap and readily available.
information failure
a situation where consumers do not have full or complete information when making decisions. consumer may not realize how bad it is for them. There is a huge quantity of information available to consumers on the internet to products. in some countries, labels help consumers make decisions. the ever-increasing information available to consumers should enable them to take rational decisions that maximize consumer welfare. Where this happens, the market works efficiently; if not, there will be an inefficient allocation of resources.
low income and underconsumption of merit goods
another reason for underconsumption of merit goods is low income. Consumers may recognize the benefits of merit goods but lack the disposable income to be able to afford to buy the goods in the quantity they would like or not at all. consumers may be ignorant of the harmful effects of demerit goods on themselves and on others. Consumers might be indifferent, choosing not to care.
solution to merit and demerit goods
Some economists argue that there is no such thing as merit goods and demerit goods. They put forward the view that in health care and smoking, it should be the individual and not the government who knows what is best for them. This contradicts the underlying assumption that the government knows better than the individual what is good or bad for them because it has considerable information at its disposal.
