Public Goods• Goods/services which are not produced at all through

the price mechanism because they exhibit:

- non-rivalry in consumption (one person consuming some doesn’t make any less available for another to consume)

- non-excludability in consumption (it is not possible to prevent someone from benefiting from the good/service)

• Eg. defence, flood defences, street lighting, fireworks displays

• So, no firm wants to provide these – there’s no money to be made!

Problems of Public Goods• Free Rider Problem: firms cannot withhold the goods from

those who refuse to pay…everyone waits for someone else to pay…no one pays…no good provided

• Valuation Problem: it is difficult to measure the value to each user - consumers tend to undervalue their use of public goods

Remedies for Public Goods• Government Provision: gov’t tends to provide public goods

with funds from general taxation …everyone pays … everyone can us them

• (without gov’t provision, these goods would be “underprovided” or not provided at all)

Merit Goods• A good which is underprovided by the price

mechanism because it tends to yield more value to consumers then they realise

• Consumers would not be willing to pay a market price for them if private firms provided the good

• (Each society has a different set of “merit goods”)

• Demerit Goods are those which are overprovided by the market mechanism and have more negative costs to consumers than they realise

Why Do Merit Goods Markets Fail?

• Lack of information and knowledge: people don’t realise the full value of the good

• Long-term benefits: people tend to focus on short-term benefit and many merit goods hold long-term value

• Unequal distribution of income: people on low incomes may not be able to afford the prices determined in the overall market, and therefore underconsume the good

Remedies for Merit Good Underprovision(also used for external benefits)

• Gov’t provision: some goods may be provided free of charge through general taxation (eg. NHS, state schools)

• Gov’t subsidies: some privately provided goods may receive subsidies to allow the price to fall, increasing access to more citizens (eg. symphony orchestras, art galleries)