Goods and services can be classified into various categories based on their nature of scarcity.
A free good is available in abundance to people. Consumption of a free good does not arise in an opportunity cost.
Examples of free goods are air, water etc. Sometimes, a good maybe a free good in one country where as it may become an economic good in another country in which the consumers have to pay to use it.
Sometimes a good may be given away free of charge, but it still may not be a free good if the production and the use of that good involves opportunity cost. For example, free gifts given away in promotions by companies. Sometimes a consumer may not have to pay for a good because it is already paid by the taxes, in that case it still involves opportunity cost, and therefore it is not a free good.
Private Goods (Economic Goods)
A private good or an economic good is a good which is scarce and the consumer has to pay a price to get that good. Most of the goods which satisfies human wants are economic goods. Anything that has money value, and anything that is scarce, and which satisfies human wants is an economic good.
There certain goods and services which cannot be produced by the private sector (which is driven by the profit motive. For the private sector to supply something, the consumers need to be charged so that the costs can be covered and the profit achieved.
The use of these cannot be charged from the consumer because the consumer who refuses to pay cannot be excluded from using the good or service. Once provided, everyone can use the good. This is known as non-excludability. There is also non-rivalry in consumption of such goods. One person consuming the good does not reduce the amount available for others to consume the same good.
A good where people underestimate the benefits of consuming. Merit goods usually have positive externalities. These are the goods, the consumption of which, are good for the society as a whole.
These goods maybe under consumed because of the lack of information. In the same way, people maybe consuming demerit goods because they don’t know that those goods are not so beneficial to the society and even to them.
Eg. Education is a merit good. People underestimate benefits of studying and so there is under-consumption.
Merit goods may be provided in a free market – but in insufficient quantities.
Merit good should not be confused with ‘public goods’. Merit goods do not have the characteristics of non-rivalry and non-excludability.
Demerit goods are the opposite of merit goods. A demerit good is defined as a good which can have negative effects on the consumer – but these damaging effects may be unknown or ignored by the consumer. Demerit goods usually have negative externalities – where consumption of them causes harmful effect to a third party or to the society as a whole. Cigarette, other tobacco products, alcohol and narcotic drugs are examples of demerit goods.