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Updated on March 8, 2011

Goods and services may be divided into two group namely free goods and economic goods. Free goods are goods which are abundantly available and useful but not scarce and do not bear a price. Examples are sunshine, air, sea water and others. Economic goods are either man-made or created by nature and are scarce in relation to demand and need time and effort to obtain. Some examples are TV sets, timber, car and others.

Economics is concerned only with economic goods because they are both useful and scarce and also bear a price. For production to complete, goods must reach the final consumer. Goods pass through a channel before reaching the consumer. This process is called the ‘process of production’. That is, from extraction to manufacturing then to distribution and finally to consumption. Goods may also be classified according to the purpose for which they are intended. In this light, we have producer goods and consumer goods.

Consumer goods are those that directly satisfy consumers’ wants and are in the hands of the consumer. Examples include loaf, a bicycle, a table and others. Consumer goods are of two types. These are perishable or non-durable goods, and durable goods. Perishable goods are goods which do not last long and have to be used soon after purchase, with examples being food, textiles and others. Durable goods last much longer and have to be bought at longer intervals, example radio, cars, furniture etc.

Capital goods are those goods which are not wanted directly for their own sake, but for the contribution they make to the production of consumer goods. Office building, machines, tools, raw materials are some examples. Sometimes, the same good may be either consumer good or producer good, depending on its use. A car for instance may be used for pleasure (serve as a consumer good) or may be used by a sales representative for business.

There are other types of goods which are provided by the state, or by businesses. They include: private goods, public goods and merit goods. A private good is a good that if consumed by one person cannot be consumed by another for example ice cream is a private good. When you eat your ice cream cone, your friend doesn’t get to consume it. Again when you wear your cloths everyone else is precluded from wearing them at the same time. Our clothes are therefore private goods. Most of the goods supplied by business and demanded by consumers are private goods. Public goods are goods that we can all consume at the same time, without anyone’s consumptions reducing another person’s consumption. By definition, a public is a good which if consumed by one person, is still available for consumption by others. Some examples are national defense, police protection, justice and others. These are also called community goods.

Many of the goods provided by governments are merit goods. Merit goods are goods that governments think people should consume or receive, no matter what their incomes are. Merit goods typically include health, education, shelter and food.

Reasons for provision of merit goods by the state

Education and health which are merit goods are provided by the state because it is felt that they will be inadequately consumed, probably due to inadequate income, if left entirely to the forces of demand and supply. By producing such goods, the government subsidizes the consumption of such goods. Incomes are therefore redistributed to favor the poor. A state’s concern over merit goods is closely related to its concern over the distribution of income. Another reason is to ensure the consumption of particular goods rather than goods in general. This aim could be achieved because the goods and services could be sold at subsidized prices.


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