Merit /Demerit/Public Goods

What are merit goods?

Goods whose consumption is regarded as beneficial to society (benefit individuals and society - positive externalities)

ex: health and education

Why are merit goods underconsumed?

People are unaware of full benefits of merit goods due to imperfect information.

positive externalities of merit goods are ignored in a free market.

Not all merit goods are used/accepted (free vaccines)

What are demerit goods?

Goods that are oversized/produced in a free market. whose consumption is harmful to people that consume them and society. (Cause negative externalities)

Ex: cigarette and heroin

What other factors affect consumption of goods?

Short term and long term decision making.

People often only consider the short term benefits or costs.

But long term private benefits of merit goods > short term private benefits

Long term private costs > short term private costs.

How do governments intervene in markets for merit/demerit goods?

Directly provide goods/services.

Use tax and subsidies.

What are public goods?

Goods consumed collectively.

They are non excludable (one person benefitting form the good won’t stop others)and non rivalry (benefit other people get from the good doesn’t lower if more people use it)

Ex: street lights

What are private goods?

Goods that must be purchased to be consumed.They are excludable and rivalry.

Ex : bread (if you eat it you stop another person form doing so)

What is the free rider problem?

That once a public good has been provided it’s impossible to stop someone benefiting from it even if they haven’t paid towards it

What causes the free rider problem?

The non excludable element of public goods

Why are public goods under provided and why is there lack of incentive for firms to provide public goods?

Consumers won’t pay for something if they can receive the benefit without paying.

It is hard to set a price of a public good as firms will overvalue its benefits and charge more for profit while consumers will undervalue it.

What are quasi goods?

Goods with elements of both public and private goods.

What is an example of a quasi good?

Roads. Tolls can make roads semi-excludable (road is restricted to those who pay) and congestion can make it rivalry.

It can be semi non rivalry too as consumer can benefit from roads whilst other consumers use it.

How can technology change a public good to a private?

Tv broad casting is excludable with subscriptions to those willing and able to pay.

What is the tragedy of the commons?

Idea people act in their own interests over interests of society.

overuse a common resource without considering it will lead to depletion.This will lead to environmental market failure and the gov will intervene.(tax,law etc)

What is an example of the tragedy of commons?

Fish stock is an common resources however due to firms being motivated by profit they will overfish and deplete the fish stock.Leading to rivalry and gov will intervene.

Go to notes on extra info market failure