Goods and Services
Topic Thirteen

Previous - Types of Business Organizations

The Distinction between Goods and Services

There are clear differences between goods and services based on the characteristics of each. A good is a tangible object while a service is intangible. The tangibility factor in goods means that goods can be touched, smelled, tasted and seen. These are absent in services. In terms of quality, goods are standard in that once produced, the quality is uniform across all lines of products. In addition, goods can be separated from seller to seller. On the other hand, services are intangible and are not really standard in quality and are inseparable from seller to seller. Another key difference between goods and services is that goods are perishable while services are nonperishable. Goods will have a long storage life and so are perishable while services are delivered at the spur of the moment and do not have a long life.


Some goods are free goods while others are economic goods. A free good is a good that can be produced by society in as much quantities as needed. Therefore, increases in free goods do not require less of them available for others and also will not require decreases in other goods. Therefore, free goods have zero opportunity cost. An example of a free good is that of air. Economic goods have a degree of scarcity and therefore have opportunity costs. The demand for such goods will result in less being available to others. Therefore, there is an element of scarcity in economic goods. Another feature of an economic good is that it can have a value placed on it. This means that it can be traded in the marketplace and valued using a form of money.

Public Goods

Public goods are goods that are usually provided by the government. In these cases, the marginal costs are zero. Good examples of public goods are health care, education, security, housing and food. Another important feature of public goods is that there is no rivalry in that one person’s consumption does not reduce availability to others. Public goods are also non-excludable giving rise to the free rider problem. This means that all persons in society are exposed to all public goods. Additionally, public goods are non-rejectable in that they are funded out of government’s revenues. For example, consumers cannot reject benefiting from street lights or from being protected by the security forces.

Private Goods

Private goods are goods that are usually provided by the private sector. These goods have the features of excludability and rivalry. Excludability means that consumers of private goods can be excluded from consuming the product by the seller if they are not willing or able to pay for them. Therefore, these goods are usually provided by producers and sellers for a profit which is very different from the case of public goods. Rivalry is also another feature of private goods because there is usually severe competition meaning one person's consumption of a product reduces the amount left for others to consume. This is so because of scarcity.

Merit Goods

Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidized or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service. Governments provide merit goods in order to encourage consumption so that positive externalities of merit goods can be achieved such as free vaccination for certain diseases. Merit goods are also provided on the grounds of equity in that governments believe that consumption should not be based solely on the grounds of ability to pay for a good or service. Merit goods are usually under-produced.

Figure 1

In the above graph, by consuming only quantity Q (free market allocation) marginal social benefit is above marginal social cost, and more of the good should be consumed. At Q, the marginal social cost is A (Q – A), and the private benefit is also A (Q – A) but the marginal social benefit is C (Q – C). Therefore, if only Q is consumed, there is an opportunity cost to society of under producing which is represented by the area of welfare loss, A, C, B. Production should increase to Q1 which is the socially efficient allocation.

Demerit Goods

Demerit goods are goods which can have a negative impact on the consumer – but these damaging effects may be unknown or ignored by the consumer. Demerit goods also usually have negative externalities – where consumption causes a harmful effect to a third party. Demerit goods have these two characteristics: 1) harmful to individual consumer and 2) also have negative externalities which are costs imposed on third parties. Demerit goods are usually over-produced.

Figure 2

In the graph above, it can be seen that at output Q which is the free market allocation, marginal social cost is greater than the marginal social benefit so there is a net loss. Therefore, there is an over production of this demerit good. Production needs to be decreased to Q1 which is the socially efficient output. Therefore, the triangle ABC represents the area lost to society of over producing this demerit good.


Whereas a good is a commodity or a physical, tangible item that satisfies some human want or need so that they will want to purchase it, a service is a type of economic activity that is intangible, is not stored and does not result in ownership. A service is consumed at the point of sale. Examples of services include postal services, transportation, accounting, banking, cleaning, consultancy, education, insurance, tourism, medical treatment and restaurant services.

Just as there is a distinction between a free good and an economic good, a similar distinction can be made between a free service and an economic service. Free services are those which cannot be bought in the market and which are rendered due to love and affection. Good examples are services of parents for their children and volunteers in non-profitable organizations. There is no charge by a parent or volunteer for the services that they provide. On the other hand, economic services are services that can be bought in the market such as services of doctors, accountants, bankers and dentists.

Next - Market Failure - Pareto Efficiency