Market Failure: Public Goods

Define a merit good

Define a demerit good

What is the link between these and market failures?

Give 5 examples of each.

Explain ways in which the government tries to increase consumption of merit goods and decrease consumption of demerit goods.

Starter: Recap

Aim: Understand public goods and how they cause

market failure.

Objectives: Define public goods and quasi public goods. Describe the features of public goods and quasi

public goods. Analyse how public goods cause market failure. Evaluate the need and benefit of public goods in the

UK.

Aims and Objectives

May cause market failure.

Not because too much or too little is produced in the free market.

Because it may not be produced at all!

Can you think of any goods which if left to the free market would not be produced at all?

Public Goods

Must possess the following to be a

public good.

Public Goods

When a public good is being consumed, the benefits of its consumption cannot be confined to only those people who have paid for it.

Those who do not pay can enjoy the benefits of consumption at no financial cost.

This is known as the free-rider problem.

1) Non Excludability

Entrepreneur builds a lighthouse. Tries to charge each ship that passes. However some do not and benefit from the light

by not crashing. There is no incentive to pay! The market fails to provide a service for which

there is an obvious need.

Non Excludability Example: Lighthouses and Ships

Consumption of a public good by one person does not reduce the availability of a good to other people.

Therefore we all consume the same amount of public goods even though our valuation of the benefit may differ.

2) Non-Rivalry

Public goods which do not have both characteristics. Peak District Appears to have both characteristics. But, can fence off areas to restrict access. Can charge for certain areas. Non-rivalry to an extent, if you are picnicking and

surrounded by only a few people, you are fine, however if it becomes busy and there is limited space, enjoyment may fall.

Quasi Public Goods

Case Study

Airwaves – A Quasi Public Good

Spot the Public Goods

Street lighting Police services Fire Services National defence Flood control systems Roads Radio programmes

Public Goods Examples

Market failure exists with public goods, as if left to the free market, these goods would not be supplied at all and quasi public goods would be under supplied.

= complete market failure

Who decides the level of output of public goods?

Public Goods and Market Failure

Government decides what output for society.

Estimate the social benefit from consumption.

Attributing a monetary value is difficult.

Spending may increase before an election.

Public Goods and Market Failure

What happens when the free market attempts to provide public goods?

Public Goods and Market Failure

New York Five Points Private fire brigades Competing to put fires out. Wasn’t more efficient. They just set fire to other

properties in able to compete and appear to be doing the better job!

DVD Clip

Root of problem is free-rider problem.

Consumers behaving rationally will attempt to ‘free ride’ from other consumers who purchase a good or service.

Once one consumer has purchased a good, others cannot be prevented from benefitting from it.

Free Rider Problem

I pay my council tax

My neighbour does not.

Both houses are burgled in the same night.

Should both houses receive police attention?

BBC as a Public Good Debate

The

BBC • The public should

pay for this public good!

• Want the license fee to remain.

• Want it to be made easier to catch evaders.

• 17 million people value the service against 6 million.

• Positive externalities.

The

Gene

ral

Publ

ic• The public shouldn’t pay for this public good!

• Only over 60s value it.

• Programming not appropriate for younger people.

• Criticisms list.• Maybe it should be

subscription, instead of taxation?

• Why should people be allowed to evade it?