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 toMarket FailureИзъяны 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 FailureMarket 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 FailureGoods/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 CommonsТрагедия 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 FailurePublic Goods• Markets would not provide

such goods and services at all!

e.g. police, street lighting,

Non- excludability неисключительность

• Person paying for the benefit cannot prevent anyone else from also benefiting - the ‘free rider безбилетники problem’

A non- excludable good?

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 themarket but would everyonebe able to afford them?

Schools: Would you pay if the state did not provide them?

Demerit Goods

De-Merit GoodsSociety suffers from the consumption of these

goods.• Goods and services provided by the market

which are not in our best interests! examplesTobacco and alcoholDrugsGambling

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 BenefitsExternal or social costs• The cost of an economic decision to a third

partyExternal 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

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 FailureExternal benefits • by products of production and

decision making that raise the welfare of a third party

External BenefitsPrice

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

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)