Holiday Work
• Over the holiday I would like you to get examples
of demerit or merit goods…. Take photos of
examples… maybe films….
•
•
•
•
Pick one…..
Ideas for reducing consumption of demerit goods
Or increasing consumption of merit goods
Or this could be positive and negative
externalities.
Introduction to
Market Failure
Изъяны Рынка
Внешние Эффекты и
рыночная
эффективность
Market Failure
рыночная неэффективность
Definition:
Where the market mechanism fails to allocate
resources efficiently
Market Failure
• Social Efficiency = where external costs and benefits затраты
и выгоды are accounted for
• Allocative Efficiency = where society produces goods and
services at minimum cost that are wanted by consumers
WHO GETS THE GOODS
• Technical Efficiency = production of goods and services using
the minimum amount of resources WITH WHAT ARE GOODS
PRODUCED
• Productive Efficiency = production of goods and services at
lowest factor cost HOW ARE THE GOODS PRODUCED
Or put simply
• Markets can function inequitably
• Markets can function inefficiently
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
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
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
Which one is the ‘quality’ item and why?
Private Goods
• i.e. goods that can be identified as your
possession.
• You have ‘Property Rights’ права
собственности over that good.
• It is therefore ‘excludable’ i.e. you can prevent
other people from using it.
Tragedy of the Commons
Трагедия общих земель
• Because it is difficult to establish property
rights there is the likelihood that this resource
will be overused and destroyed.
Overfishing
Rubbish Island in Pacific
The Great Pacific Garbage Patch
ARAL SEA
1973
1986
2001
2004
Market Failure
Public Goods
• Markets would not provide
such goods and services at
all!
e.g. police, street lighting,
A non- excludable good?
Non- excludability
неисключительность
• Person paying for the benefit
cannot prevent anyone else from
also benefiting - the ‘free rider
безбилетники problem’
Would you pay for this?
Merit Goods & Demerit Goods
• Consumption of merit goods gives social
benefits or imposes social costs.
• In groups of two, think of examples of each
and why….
Merit Goods
• nurseries,
• schools,
• colleges,
• universities
could all be provided by the
market but would everyone
be able to afford them?
Schools: Would you pay if the state
did not provide them?
Demerit Goods
De-Merit Goods
Society suffers from the consumption of these
goods.
• Goods and services provided by the market
which are not in our best interests! examples
Tobacco and alcohol
Drugs
Gambling
De-merit goods
• Merit goods are ‘good’ for you. De-merit goods are thought to
be ‘bad’ for you
"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.
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
• Tengri News March 2013
Marginal Social Cost
Price
+ Marginal Private Cost
Marginal Private
Cost
P2
Pe
Negative
Externality
P1
Marginal
Benefit = D
0
Quantity
Marginal Social Cost
Price
+ Marginal Private Cost
Marginal Private
Cost
P2
Pe
Negative
Externality
P1
Marginal
Benefit = D
0
Quantity
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
оптимум
MSC + MPC
Предложение (частные издержки)
£12
Издержки загрязнения
£7
£5
Socially efficient output is where
MSC = MSB
Cпрос частная ценность
80
100
Quantity Bought and Sold
Market Failure
External benefits
• by products of production and
decision making that raise the
welfare of a third party
External Benefits
Price
MSC
Value of the positive
externality (Welfare Loss)
$10
$6.50
$5
Social Benefits
MSB
Socially efficient output
is where
MSC = MSB
MPB
100
140
Quantity Bought and Sold
Market Failure
Measures to Correct Market Failure
•
•
•
•
•
•
•
•
State Provision
Extension of property rights
Taxation
Subsidies
Regulation
Prohibition
Positive Discrimination
Redistribution of Income
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)