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

Log in