Tuesday, 17 November 2009

Market Failure: Public, Merit and Demerit goods (AS-Level)

Market Failure: Public, merit and demerit goods (AS-Level Economics)

Some goods are not at all provided by the private sector because there is no incentive to do so. These goods are called public goods and they are generally goods which ‘good’ for you. For example the ‘fire brigade’.
Public goods are distinguished by three key characteristics:

1. Non-rivalrous/ non-diminishable: This means that the consumption by one person will not reduce the amount for another for example, if someone watches a firework display then this does not reduce the ‘benefits’- enjoyment that others can receive from it.

2. Non-excludable: people cannot be excluded from benefiting in the good in any way for example everyone can receive benefit from street lighting, people who cannot afford it are not excluded.

3. Non-rejectable: for example just because you do not want to be protected the national defence does not mean you can have the choice to do so, it is good which you have to accept.

Some goods only have one characteristic and therefore fit in a completely different category. These goods are called ‘quasi-public goods’. An example of this would be the beach because it may be designed to be non-rivalrous, non-excludable and non- rejectable but this is not the case in reality. It usually is but if there are too many people then your benefit gained from consuming the good may be reduced. Also, not all beaches are 100% non-excludable because some beaches restrict smoking or people with dogs or even better some beaches are private.

Merit goods

These are goods, which are good for you but tend to be under-consumed because they are supplied through the private sector and there tends to be an information failure as well. It is usually because people aren’t aware of the benefits so the demand isn’t as high as it should be. These goods also cause positive externalities. For example, schools can be private and state-run. However, it is important that government has stepped in to produce state-run schools because otherwise many people would not go to school and this would have cause things like increased crime. Therefore, a merit goods like schools cause positive externalities i.e. going to school reduces crime.

Demerit goods

These are the opposite to merit goods; these are goods which are bad for you e.g. alcohol and cigarettes. If left to the free-market economy, then as the demand for these products tends to be inelastic, prices would be too low to compensate for the externalities produced and the quantity would be too high. Subsequently, the goods are overproduced. That’s why the government must intervene to cut the production and inform peoples of the negative impacts. Some goods have such major negative impacts that they have to be banned for example; illegal drugs like heroin.

This is linked into market-failure because of the free-rider problem. Firstly, negative externalities hold a big cost to society that’s why they can cause a market to fail i.e. if left to free-market everyone would be smoking cigarette which would stress the NHS and people would be spending their income on the wrong things. With merit goods, people would not pay for certain advantages they gain through activities of others and so they get a free ride. This mean there is no incentive of profits for the private sector and if no one provides for these goods like (e.g. street lighting) then the market fails.

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