Unit11.4B:Marketfailureand government intervention

LO:Distinguish private and public goods and their characteristics and

LO:Distinguish merit and demerit goods and their characteristics

 

LESSON OBJECTIVES1. Describe characteristics of private goods

and public goods and ask provide examples

2. Describe characteristics of merit goods and de-merit goods and ask provide examples

3. Identify possible externalities associated with both types of goods, and

4. Construct a diagram to illustrate how these goods might impact on market efficiency and cause market failure.

Private Goods

DEFINITION i.e. goods that can be

identified as your possession.

You have ‘Property Rights’ права собственности over that good.

PRIVATE GOODS:CHARACTERISTICS

1. Excludable(“property rights”)

Consumers of private goods can be excluded from consuming the product by the seller if they are not willing or able to pay for it.

For example a ticket to the theatre or a meal in a restaurant is clearly a private good

2. Rivalry

With a private good, one person's consumption of a product reduces the amount left for others to consume and benefit from - because scarce resources are used up in producing and supplying the good or service.

Example: If you order the latest smartphone, that smartphone is no longer available to someone else.

EXAMPLES

PUBLIC GOODSDEFINITION:•  A “public good” is a

product or service which benefits everyone in the community

• Pure public goods are not normally provided at all by the private sector because they would be unable to supply them for a profit

CHARACTERISTICS

1. Non- excludability неисключительностьPerson paying for the benefit cannot prevent anyone else from also benefiting or consuming the product- the ‘free rider безбилетники problem’общественные блага Рынки не будут предоставлять такие товары и услуги на всех! например Полиция, уличное освещение,

Неисключимость неисключительность Человек платит в пользу не может предотвратить никого из также пользуются - на «проблему безбилетника безбилетники ‘2. Non-rival consumption: Consumption of a public good by one person does not reduce the availability of a good to everyone else “This causes “free-rider” problem –ie. it means that people have a temptation to consume without paying!

THIS RESULT IN “MARKET FAILURE”

EXAMPLES

PUBLIC GOODS AND MARKET FAILURE• Pure public goods are not normally provided at all by the

private sector because they would be unable to supply them for a profit.

• Thus the free market may fail totally to provide important pure public goods

• Government decide what output of public goods is appropriate for society.

• To do this, it must estimate the social benefit(ie.benefits to society) from the consumption of public goods.

• Problematic putting a monetary value on the benefits from for eg. street lighting and defence systems

• The electoral system provides an opportunity to see the public choices of voters .

Merit Goods & Demerit GoodsDEFINITION:

goods and services where the social benefits exceed the private benefits

Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or

provided free at the point of use(eg. Vaccination) so that consumption does not depend primarily on the ability to pay for the good or service.

In groups of two, think of examples of each and why….

Потребление заслуг товаров дает социальные льготы или налагает социальные издержки.

В группах по два, подумать о примерах каждый и почему ....

MERIT GOODS-CHARACTERISTICSA merit good has two characteristic: People do not realise the true

benefit. For example, people underestimate the benefit of education or vaccinations.

Usually these goods have positive externalities.

Therefore in a free market there will be under consumption of merit goods.

Merit Goods- Examples

nurseries, schools, colleges, universities

could all be provided by the

market but would everyone

be able to afford them? детские сады, школы, колледжи, университеты все они могут быть предоставлены рынок, но будет все смогут позволить себе их?

Schools: Would you pay if the state did not provide them? Вы бы платить, если государство   не предоставлять им?

Merit goods and market failure Merit goods provide positive

externalities but if left wholly to the private sector, it is likely that merit goods will be under-consumer and under-supply

Partly this is because individuals do not understand or appreciate the social benefits that can result from consumption of education and health services to name just two examples

Demerit GoodsDEFINITIONSociety suffers from the consumption

of these goods. Goods and services provided by the

market which are not in our best interests(“bad goods”)

The government normally tries to reduce consumption of de-merit goods

Merit goods are ‘good’ for you. De-merit goods are thought to be ‘bad’ for you

Activity: Provide some Examples

A demerit goods has two characteristics:

1.A good which harms the consumer. For example, people don’t realise or ignore the costs of doing something e.g. smoking, drugs.

2.Usually these goods also have negative externalities.

Therefore in a free market there will be over consumption of these goods.

De-Merit Goods: CHARACTERISTICS

De-merit goods-Examples

SmokingDrinkingTaking drugsGambling

De-merit goods and market failure

De-merit goods create negative externalities which leads to a reduction in social economic welfare.

The government may decide to intervene in the market for these goods and impose taxes on producers and / or consumers.

Higher taxes cause prices to rise and should lead to a fall in demand

Market Failure рыночная неэффективность

Definition:

Where the market mechanism fails to allocate resources efficiently

Где рыночный механизм не в состоянии эффективно распределять ресурсы

Or put simply

Markets can function inequitably

Markets can function inefficiently

Рынки могут функционировать несправедливо

Рынки могут функционировать неэффективно

Imperfect Knowledge: Asymmetry of Information

Consumers do not have adequate technical knowledge

Advertising can mislead or mis-inform Decisions often based on past experience

rather than future knowledge Потребители не имеют адекватного

технических знаний Реклама может вводить в заблуждение или неправильно информирует Решения часто основанные на прошлом опыте, а не в будущем знаний

Market Failure

Market Failure occurs where: Imperfect Competition Несовершенная Конкуренция

Externalities Внешние Эффекты

Incomplete Information Неполная Информация

Market Failure

Market Power:

Monopolies and oligopolies

Collusion

Price fixing

Supernormal profits

Barriers to entry

Монополии и олигополии сговор фиксация цен Сверхъестественные прибыль Барьеры входа

Market Failure

Goods/Services are Differentiated

Branding

Designer labels - they cost three times as much but are they three times the quality?

Labelling and product information брендинг

Дизайнерские этикетки - они стоят в три раза дороже, но являются они в три раза качество?

Информация Маркировка и продукт

Which one is the ‘quality’ item and why?

Tragedy of the Commons(“Free-riders”)Трагедия общих земель

Because it is difficult to establish property rights there is the likelihood that this resource will be overused and destroyed.

Потому что это трудно установить права собственности есть вероятность того, что этот ресурс будет злоупотреблять и уничтожены.

Overfishing

Rubbish Island in PacificМусор Остров в Тихом океане

The Great Pacific Garbage Patch

ARAL SEA

1973 1986

2001 2004

"Smoking may become a reason of long and painful death".

"Smoking causes drug addiction"

"Smoking during pregnancy causes harm to your child".

"Smoking causes impotence".

Activity 5 minutes

How can a government limit the consumption of demerit goods?

How can the consumption of merit goods be encouraged?

Think of as many ways.

Как может правительство ограничить потребление штрафных товаров? Как потребление заслуг товаров поощрять? Подумайте, как много способов.

Market Failure

External Costs and Benefits

External or social costs

The cost of an economic decision to a third party

External benefits

The benefits to a third party as a result of a decision by another party

Market Failure

External Costs

e.g. Pollution traffic congestion, environmental

degradation depletion of the ozone

layer

One ton of industrial wastes per resident in Pavlodar oblast Одна тонна промышленных отходов на одного жителя в Павлодарской области

Tengri News March 2013

TYPES OF EXTERNATILITIES

NEGATIVE EXTERNALITIES

A negative externality is a cost that is suffered by a third party as a result of an economic transaction

Third-parties include any individual, organisation, property owner, or resource 

For example, no one owns the oceans and they are not the private property of anyone, so ships may pollute the sea without fear of being taken to court

POSITIVE EXTERNALITIES

External benefits -Benefits from production (or

consumption) experienced by people other than the producer (or consumer).

A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. For example, with healthcare, private treatment for contagious diseases provides a considerable benefit to others, for which they do not pay. 

EXTERNAL COSTS AND BENEFITS IN PRODUCTION

EXTERNAL COSTS AND BENEFITS IN CONSUMPTION

Price

Quantity0

Marginal Benefit = D

Marginal Private Cost

Marginal Social Cost

+ Marginal Private Cost

Negative Externality

P1

Pe

P2

Price

Quantity0

Marginal Benefit = D

Marginal Private Cost

Marginal Social Cost

+ Marginal Private Cost

Negative Externality

P1

Pe

P2

Marginal Cost Curve

Marginal cost curves are U shaped.

The cost of producing the extra item is considered to fall at first

then it will rise

This is because of economies and then diseconomies of scale

Marginal Benefit Curve

Downward sloping

I.e. the benefit from consuming the extra unit of output will decline

I.e. the value the consumer puts on the extra good will fall and the quantity increases.

Внешние Эффекты Производство

Price

Quantity Bought and Sold

Cпрос частная ценность

Предложение (частные издержки)

£5

100

MSC + MPC

£12

Издержки загрязнения

£7

80

Socially efficient output is whereMSC = MSB

оптимум

Market Failure

External benefits by products of production

and decision making that raise the welfare of a third party

Внешние преимущества продуктами производства и принятия решений, которые повышают благосостояние третьей стороны

External Benefits

Price

Quantity Bought and Sold

MPB

MSC

$5

100

Value of the positive

externality (Welfare Loss)

Socially efficient output is whereMSC = MSBMSB

$10

$6.50

140

Social Benefits

Market Failure

Measures to Correct Market Failure

State Provision Extension of property rights Taxation Subsidies Regulation Prohibition Positive Discrimination Redistribution of Income

Меры по исправлению провал рынка Государственный Предоставление Расширение прав собственности налогообложение Субсидии регулирование запрет Позитивная дискриминация Перераспределение доходов

Homework

Gyms and sports halls are merit goods…. With the help of an appropriate diagram, explain why merit goods are often underprovided.

(8 marks)

or

With the help of an appropriate diagram, explain how taxation can reduce the negative externalities (pollution) caused by factories.

(8 marks)

Спортзалы и спортивные залы заслуга товар .... С помощью соответствующей диаграмме, объяснить, почему заслуга товары часто недоначислено. (8 баллов) или С помощью соответствующей диаграмме, объяснить, как налогообложение может уменьшить негативные внешние (загрязнение), вызванных заводов. (8 баллов)