merit goods

what are 4 causes of market failure

1. negative externalities

2. positive externalities

3. asymmetric information

4. public goods

define market failure

a situation where the price mechanism fails to allocate resources efficiently

define private and social benefits

1. benefits felt by the producer and consumer involved in market transaction

2. benefits to whole of society

define external benefit

benefits to a third party outside of the market transaction, not taken into account via price mechanism

what is a merit good with examples

a good that benefits the whole society. not just individuals who consume them e.g. healthcare and education

what does consuming a merit good do

produces a positive externality which is when the social cost exceeds the private benefit

education as (4) LT LT EP HR

. many parents underestimate the long-term benefits

it is a long term investment decision. the private costs must be paid now but the private benefits are seen much later(higher wages)

education can increase earning potential and productivity

higher spending on education could provide a stimulus for higher-level research leading to increased long-run rate of growth

why would a government provide merit goods 3

1. encourage consumption so positive externalities of them can be acheived

2. overcome information failure linked with them

3. equity- consumption should not be based on the ability to pay for them

merit good chains of reasoning 4

1. merit goods produce positive externalities

2. these externalities have a higher social benefit than private cost

3. these are often under produced and under consumed in a free market

4. when consumed these 3rd party spill over effects can have a significant effect on social wealfare