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Market Failures

Market Failures. Merit and demerit goods. Definition. When the free market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity. Market failure. Negative externalities

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Market Failures

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  1. Market Failures Merit and demerit goods

  2. Definition When the free market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity.

  3. Market failure • Negative externalities • Positive externalities • Merit & demerit goods • Public goods • Monopoly • Immobility of the factors of production • Unequal distribution of income and wealth

  4. Information failure 3 Imperfect information meaning merit goods are under-produced while demeritgoods are over-produced or over consumed.

  5. Merit Goods Definition A good that would be under-consumedin a free market, as individuals do not fully understand the benefits that derived from the consumption of that goods Examples • The NHS • State Education • Public leisure centres • Vaccinations • Public Libraries • Screening for cancer • Eye tests • Dental care

  6. Closing the information gap • Improved information on healthy living to counter the risk of growing obesity and associated health risks. • The result being an increase in the take up of activities that improve health and promote the positive externalities that go with its consumption. Costs and benefits S (MSC) E2 P2 P1 E1 D2 (MSB) D1 (MPB) QDS1 QDS2 Quantity

  7. Demerit Goods Definition Goods that are typically considered to be ‘bad’ for one. Such goods would be over-consumed in a free market, as it brings less overall benefit to consumers than they realise. In addition to this, consumption may well lead to external costs that are not taken account of. Examples • Alcohol • Cigarettes • Gambling • Drugs • Chocolate ? • Fast foods ? • Fizzy drinks ? • High heeled shoes ?

  8. Closing the information gap • Improved information on the disbenefits of consumption and greater awareness of the negative consequences to the individual and potential spills over effects to third parties. • The result being a reduction in the consumption of demerit goods to a more socially optimum level. Costs and benefits S (MSC) E1 P1 D1 (MPB) P2 E2 D2 (MSB) Q2 Q1 Quantity

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