Goods and Market Failure

Public Goods

These are services that are provided by the government. Pure public goods have the following characteristics:

  • Non excludability – everyone can consume the goods whether they pay or not
  • Non rivalry in consumption – consumption by one person doesn’t reduce consumption for others
  • Examples – street lighting, national defence

Public Good and Market Failure

  • You cant get an individual to pay for public goods as others can get the benefits from consumption without paying
  • Private companies will not supply public goods as they don’t make an economic profit on them
  • Public goods are only supplied by the government and financed through taxation

Private Goods

Private goods have the following characteristics:

  • Excludability – if you don’t pay you can be excluded from consuming the product
  • Rivalry – the consumption of one person reduces the amount available for others to consume
  • Rejectability – you can choose not to consume them and therefore reject them

Merit Goods

Merit goods are where social benefits exceed social costs – they generate positive externalities

  • Governments aim to provide more of these goods due to the benefits to society
  • They may subsidise the production of such goods reducing the marginal costs of consumption and therefore increasing demand
  • Examples – healthcare, education

Merit Goods and Market Failure

  • If the government didn’t step in and produce merit goods then they would be under produced
  • Attributable to the fact that individuals do not realise the benefits of consuming these goods

Demerit Goods

Demerit goods are where social costs outweigh social benefits – they generate negative externalities

  • Governments try and reduce the consumption of these goods through higher taxes
  • Examples – cigarettes, alcohol

 

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