Public and Merit Goods

Public and Merit Goods: 

Public and Merit Goods

Slide 2: 

The meaning of market failure So far we have seen how the market should work in theory however sometimes the market fails to deliver an efficient allocation of resources – this is called market failure Market failure results in productive inefficiency because businesses are not maximising output – the lost output could have been used to satisfy more wants and needs. Resources are misallocated and producing goods and services that are not wanted by consumers – these resources could have been put to better use. Sometimes there is complete market failure when the market does not produce ( a missing market ) Other times there is partial market failure when the market produces too much or too little

Slide 3: 

Market Failure - Perfectly Competitive market requirements For us to understand why a market fails we have to understand the ideal scenario – the way that a market should work. When we discuss the way that the market is in equilibrium, then disequilibrium and how changes in price (the price mechanism) we are talking about market forces working properly For this to happen, market forces have to work perfectly and a few things need to be in place There needs to be Many buyers and sellers – all firms and consumers are small relative to the size of the market so that no one has market power None of these buyers and sellers should be able to influence the price so they are called ‘price takers’ The market product must be homogeneous (all exactly the same) e.g. the market for gold – gold is gold – there is no difference between the gold that one seller supplies and another. If there is no way of differentiating the buyer will always buy from the supplier who is selling at the lowest cost.

Slide 4: 

Market Failure - Perfectly Competitive market requirements The market should be no barriers to entry or exit - it should be easy/cost free for a firm to come into the market and easy/cost free for a firm to exit the market. This means that the amount of output they need to produce to reach that productively efficient point is low and that set up costs are low. Also they can leave the market at lowest cost – so that if they are making a loss they will leave the market Sellers should have perfect information – they need to know everything about the product and be able to shop around so that they can see if the price is reasonable and the product is worth buying to be able to make a buying decision. If all of these things happens then scarce resources are allocated efficiently – the whole point of economics!

Private Goods: 

Private Goods The private sector can supply private goods because they can charge consumers and make a profit

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Public and Merit goods Watch this mjmfoodie video http://www.youtube.com/watch?v=mYtW1Ug7L_s&feature=related

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Private goods vs Public goods Private goods are the opposite to public goods so if we understand what they are first then we will understand what public goods are Businesses in the private sector provide private goods Characteristics of private goods Private goods are excludable - c onsumers of private goods can be excluded from consuming the product if they are not willing or able to pay for it For example - a ticket to the theatre or a sports event or a meal in a restaurant - If you don’t pay, you don’t consume and benefit from the good or service! Private goods are rival One person's consumption reduces the amount left for others to consume Scarce resources are used up in producing and supplying the good or service There is an opportunity cost Private goods are rejectable Private goods can be rejected

Slide 8: 

Public goods Pure public goods have three main characteristics: Non-excludability: The benefits of public goods cannot be confined to those who have paid for it Non-payers can enjoy the benefits of consumption at no financial cost to them Non-rivalry in consumption: Consumption of a public good by one person does not reduce the availability of a good to others In other words, if the good is provided for one person it must be provided for others Non-rejectable If a public good is provided, we cannot avoid it

Pure Public Goods: 

Pure Public Goods Pure public goods are also known as collective consumption goods National Defence Systems Sewage and Waste Disposal Systems Lighthouse Protection National Rail Safety Systems Street Lighting The market would not provide these so they are called full market failure or a missing market Why would the market not provide? Free riders!

Which one is the odd one out?: 

Which one is the odd one out? The benefits of water filtration systems The enjoyment of a fireworks display The light for passing ships Chilling out on the beach

Semi-Public (Quasi) Public Goods: 

Semi-Public (Quasi) Public Goods These are products that are public in nature, but do not exhibit fully the features of non-excludability and non-rivalry They may become rival e.g. at peak times when congestion occurs On grounds of equity (fairness) the government may provide these goods directly and finance them through general taxation There is an element of excludability or rivalry in consumption Examples might include: Motorways and major roads Parks Terrestrial television (public service broadcasting) Police Force protection Galleries and Museums Airwaves

Why does the state provide public goods?: 

Why does the state provide public goods? Because public goods are non-excludable, profit-seeking firms will not provide them . The non-excludability of a public good encourages some consumers to avoid payment and become free riders. Firms cannot collect all the revenue needed to supply the public good and make a profit. The state/government provides them On grounds of equity – so that people on all levels of income can have access to them Provision on grounds of need rather than ability to pay On grounds of efficiency Easier to provide them collectively Economies of scale from providing to all To overcome the free-rider problem To correct for market failure – the failure of the market to provide sufficient public goods (partial market failure)

Merit and Demerit Goods: 

Merit and Demerit Goods

Slide 14: 

Information failure: merit goods and demerit goods Before we saw how important the price mechanism is (rationing, signalling, incentive) the price has to include all the costs so that the consumers and producers can make their decisions and the market doesn’t under or over produce. Now we will look at what happens when there is information failure and how that affects the price mechanism

Slide 15: 

Information failure: merit goods and demerit goods Merit goods are products that society values and judges that society should have regardless of whether an individual wants them It is important to remember that to classify a good as a merit good will require society to make a value judgement The UK government believes that individuals may not act in their own best interest in part because they do not have the full information on the long term benefits (information failure) Merit goods are an example of partial market failure – where the free market will lead to the provision of a product but in the wrong quantity leading to a misallocation of resources Government will seek to encourage more consumption of merit goods

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If the government didn’t provide schools would everyone pay for it? Maybe you would be too poor to afford it and leave your kids at home The market would not provide enough so government has to step in

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Examples of Merit Goods

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Information failure: demerit goods Demerit goods are those products that society deems as bad for you - again a value judgement is being made Smoking, Drugs, Gambling, foods that make you obese are all examples of demerit goods in western society A product that the government believes consumers overvalue because of imperfect information. A demerit good is ‘ socially undesirable ’ and ‘worse’ for a consumer than the consumer realises e.g. alcohol Government will seek to reduce consumption of merit goods

Slide 19: 

Government Intervention If markets won’t deliver or won’t deliver enough there are several things that government can do Direct provision Supply them directly to consumers e.g. schools and hospitals It could buy it directly or pay a company to provide it Advantages? Government controls the supply e.g. number of hospital beds and number of soldiers Disadvantage? May be inefficient – employees of the state have no incentive to minimise costs The wrong mix of goods may be produced (too many soldiers and too few hospital beds) If the market produced too many soldiers they would be left unsold and firms would move resources out of production of defence

Slide 20: 

Government Intervention Government could subsidise provision It might pay for part of the service and expect consumers to pay the rest Prescriptions and dentistry Advantages? Increases the amount of dental care provided which hopefully maximises economic welfare Can help those on low incomes Disadvantages? Government is ‘captured’ by the industry The EU government listens to the powerful farming lobby and gives them subsidies that have become very large This causes the welfare gains to the farmers to be higher than the loss to the consumers and society

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Government Intervention Government can regulate Leave provision to the private sector but force consumers to purchase or suppliers to produce Motorists are forced to buy car insurance Some say workers should be forced to pay for pensions Motorway service stations are forced to provide free toilet facilities whether or not they buy anything Advantages? This requires little or no taxpayers money to provide the good Consumers will shop around in the free market looking for the best value which ensures productive and allocative efficiency Disadvantages? Regulation can impose heavy costs on the poor in society How many poor families could afford to pay private health insurance if it was a requirement for them to do so? Regulations can be ignored Some parents would not send their children to school if they had to pay for it The more likely citizens are likely to evade regulations the less efficient they are as a method of providing services

Slide 22: 

Government Intervention All of these solutions also suffer from valuation problems What is the socially optimum amount of output for a good? So, how much should be provided? Who knows! Answer the DataQuestion on P105 (Anderton)