A good is a physical object that can be owned and consumed later (e.g., a textbook, a smartphone). A service is an intangible activity performed for someone (e.g., a haircut, a tutoring session). Think of a good as a product you can hold and a service as a handshake you can feel.
Merit goods are those that society believes people should consume more of than they naturally would. They have positive externalities – benefits that spill over to others. Examples: vaccinations, education, public libraries. 📚💉
When people lack full information about a good’s benefits, they tend to buy less than is socially optimal. This is called under-consumption.
Imagine you’re at a fair and you see a free health check-up booth (a merit good). If you don’t know that early detection can save money later, you might skip it. The information gap leads to fewer people getting checked, even though everyone would benefit.
Mathematically, the demand curve for a merit good can be represented as:
\$Q_d = a - bP\$
Here, a is the maximum quantity demanded when price is zero, and b shows how sensitive demand is to price changes. If people don’t know the true value of a, the actual demand falls below the social optimum.
| Type of Good | Example | Key Feature |
|---|---|---|
| Normal Good | Laptop | Demand rises with income |
| Inferior Good | Instant noodles | Demand falls as income rises |
| Public Good | Street lighting | Non‑excludable & non‑rivalrous |
| Merit Good | Vaccination | Positive externalities, under-consumed |
Good luck! 🎓