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)