AS Economics 9708

Topic: Types of Goods and information failure

1. Public goods
2. Private goods
3. Quasi-public goods
4. Merit goods
5. Demerit goods
Public Goods
A good that have the following characteristics is called a public good:
1. Non-excludable … it is not possible to exclude payer from non-payers as at the time of consumption
no one is being charged. In other words, if one can consume than everyone can consume leading to
create the problem of free riders. Free riders are those who consume but don’t pay
2. Non-rival (Non-diminishable/non-exhaustible)… consumption by one person will not leave less for
another. This means, if one individual consumes a good and at the same time another individual also
start consuming the same good then first consumer’s benefits will not diminish.
3. May be non-rejectable… once provided cannot be rejected by anyone
4. Marginal cost may be zero… marginal is the cost of producing an extra/additional unit.. if one more
person uses the public good then its additional cost will be nothing
Examples: Street lighting, defence, flood control system, light houses, public drainage, Police,
Pavements, pollution control, fireworks
Who provides public goods in a free market?
In free market economy no one provide public goods because of free riders as many people will
consumes the public goods as at the time consumption no one is being charged but later on they will not
pay hence no private sector firm provides these public goods even though these firms can provide. In
free market economy such goods have no market… public goods have missing markets in free market
economy.
Who provide these public goods which are beneficial for the whole society?
These goods can be provided either by the government directly through its own state owned
organisations and the government may provide finance to private sector to resolve the issue of free
riders.
How to decide the quantity of a public good to produce?
The socially optimum (best possible) quantity of public good should be provided that means the public
goods should be produced and provided where the social benefits received by the society must be equal
to the cost borne by the society to provide those public goods. Conditions MSC = MSB
Private goods
Have the following characteristics:
1. Excludable
2. Rival
3. Rejectable
Examples: cell phone, ball pen, textbook, laptop, car
Quasi-public goods
Have some of the characteristics of public goods and some of the characteristics of private goods. This
means a quasi-public good will be excludable but non-rival (club goods) OR non-excludable but rival
(common pool resources)
Quasi-public goods are those goods which have some of the characteristics of public goods and some of
the characteristics of private goods. In other words, these are semi-public and semi-private goods
i. Common resources (non-excludable but rival) …. Fish ponds, river, ocean and islands
ii. Club goods (excludable but non-rival) … TV cable provider, Microsoft windows, internet provider
Merit Goods
have the following characteristics:
1. Most have positive externalities … those people who are not directly involve in the consumption of
that good can obtain benefits without spending money as these goods are beneficial for the third party
2. individuals/consumers are unaware of true benefits of consuming them… information gap/failure …
their users underestimate their true benefits that is why such goods are consume less than their desired
level
Examples: Health care, education, training, insurance, wearing seat belts, wearing crash helmets
Why individuals under-consume these merit goods?
1. May lack knowledge/information
2. May take short term view … use myopic… they at the present rather than at the future… such goods
provide more benefits in later life and encourage others
3. May be misinformed… about the benefits of having higher education, keeping good care of their
health
How such goods consumption can be increased upto an optimal level?
Government may encourage the consumption of merit with the help of the following methods:
1. Providing information … the benefits of keeping good health, education
2. Subsidies … may provide financial assistance to those private and public sector organisations
providing merit goods to encourage such goods production and or consumption
3. Providing state health care and education free of cost
4. Making consumption compulsory such as education
5. Set a price which must be quite below the free market price hence poor people can also afford
Demerit goods
Has the following characteristics:
1. most have negative externalities… this means these goods adversely affect those who are not directly
involved either in production and or in consumption
2. individuals/consumers are unaware of true cost of consuming them … lack of information about such
goods harmful effects
Such goods are overconsumed/overproduced in the free market.
Examples: cigarettes, alcohol, screen time, junk food
Why demerit goods are overconsumed in a free market?
B/c individuals
1. May lack knowledge … lack of information about their true harmful effects people use more than
their desired level
2. May take short term view… this means smokers may think that consuming a single cigarette will not
damage the health a lot … but consuming cigarettes consecutively … create troubles in their later life
3. May be misinformed … they give examples of smokers or binge drinkers who are aged and they are
addicted since long
How to discourage consumption of such demerit good?
Government may discourage such goods consumption by
1. Providing information … printing pictures showing smoking creates cancer and hence kills
2. Tax … special rate of GST on such demerit goods such as excise duty (it is a special type of GST which is
imposed on demerit goods at higher than the normal GST to discourage such goods consumption)
3. Regulation… may impose laws such as making consumption illegal … or set minimum age limits
4. Set a price which must be quite high than the free market price hence people especially youngsters
cannot afford … minimum price aka price flooring
Q. Merit goods are public goods or not?
Merit goods examples are education and health care
Merit goods are example of private goods b/c merit goods are excludable, rival, rejectable and there
marginal cost may be more than zero.

Information failure aka information gap

Where people don’t have full or complete information… they may cheat/get cheated b/c of lack of
information… inefficient resource allocation
i. Having no information
ii. Have incomplete information
iii. Misinformed
iv. Asymmetric information… when one party has greater access to information than the other
Merit goods … individuals are not fully aware about true benefits of consuming them …. That’s why such
goods are under consumed
Demerit goods … individuals are not fully aware about true cost of consuming them … that’s why such
demerit goods are overconsumed
B/c of lack of information merit and demerit goods is not consumed to their desired level.
B/c of asymmetric information … it leads to create two types of problems
1. adverse selection
2. Moral hazard
Who decides what are merit and demerit goods?
Merit and demerit goods are based on value judgements
Merit goods …. Are good for their users and for the third party as well
De-merit goods … are bad for their users and for the third party
If a consumer consumes a demerit goods … what right the society has to say that he/she is making a
wrong decision… if society decides then we enter into the area of value judgment … one’s own opinions
If we allow society to decide what is good and what is bad for people then we are accepting that
‘Society knows best’ and has some right to make a value judgment. This is called Paternalism… is a
situation where society knows best and has some right to make a value judgment…. Regardless of what
people/individual believe.

Note: some goods are considered as merit goods but at the same time in any other society those goods
are considered de-merit goods … such as contraception and abortion

Time dimension in economics

Change is almost everywhere … in economics we also consider change to assess how over time ‘change’
can affect the economic concepts such production/supply…
Production is the activity in which inputs/factors of production are transformed into output.
How long will it take to change the output by a larger extent?
It depends upon to what extent change can be made in the inputs/FOPs.
1. The momentary Run or very short run
The time period during which all the inputs/FOPs remain unchanged hence output cannot be changed at
all. As a result supply will remain same.
2. The short Run
The short run is the time period during which at least one of the inputs remain fixed (i.e. capital) and at
least one of the inputs is variable (i.e. labour)… during the short run the firm/employer to produce more
output can employ more labour only but capital will remain same. As a result in the short run output can
be increased to a smaller extent as capital is fixed and only labour is variable.
Note: in the study of economics there is no fixed time duration associated with each time period. A
short run in economics can be of one month or one year or even five years unlike Business studies
where short run is the time period upto one year.
3. The Long Run … is the time duration during which all the inputs such as labour, capital and land are
variable except technology, government regulations and social considerations remain constant.
Output can be increased or changed by a larger extent
4. Very Long Run … Time period when all key inputs/FOPs are variable along with technology and
government regulations. Output can be increases or changed by a very large extent

Note: it is impossible to put an exact timescale on any of these time periods… as it depends on particular
circumstances that varies from industry to industry