- Introduction
- What are Merit Goods?
- What are Examples of Merit Goods?
- Why would the government intervene to provide merit goods?
- An example of government intervention of a merit good:
- What are public Goods?
- What are examples of public goods?
- Why would the government intervene to provide public goods?
- Summary Table: Merit Goods vs. Public Goods
- Knowledge checkpoint: Explain why the government intervenes to provide public goods
- Knowledge checkpoint: Explain why the government intervenes to provide merit goods
- Market failure
- What are the types of market failure?
- 📉 The Over-Provision/overconsumption of Demerit Goods
- 🚫 The Under-Provision/Non-Provision of Public Goods
- 🏥 The Under-Provision of Merit Goods
- 🏢 Monopoly Power
- 🌫️ Negative Externalities
- 🌿 Positive Externalities
- ⚖️ Wealth/Income Inequality
- 🧩 Lack of Information
- Knowledge checkpoint: Other than income inequality, describe 4 different types of market failure.
- Government Intervention to Correct Market Failure
- What are the different types of government intervention to correct market failure?
- Using Taxes 💰
- Providing Public and Merit Goods 🏥📚
- Legislation 📜
- Quotas 📊
- Subsidies 💸
- Maximum Price 📉
- Minimum Price 📈
- Privatisation 🏢
- Deregulation 📈
- Regulatory Bodies 🏛️
- Renationalisation 🏢
- However... government intervention isn't all free! 🚫💸
- Knowledge checkpoint: Draw a market diagram to show the effect on a market of setting a maximum price
- Knowledge checkpoint: Explain one possible effect on employment of the government’s decision to lift the pay cap
- Knowledge checkpoint: Explain reasons for government intervention in a market.
Introduction
👉 Let's explore what makes merit goods and public goods unique and why they are important to our society.
What are Merit Goods?
- This happens because if left to the free market, many people might not be able to afford these goods, even though their consumption has positive effects on society.
- Governments often intervene to ensure that these goods are available to everyone.
What are Examples of Merit Goods?
Healthcare 🏥: Health services improve the overall health of the population. The National Health Service (NHS) in the UK provides healthcare free at the point of use, ensuring everyone can receive medical treatment without worrying about the cost.
Why would the government intervene to provide merit goods?
- The government ensures that merit goods like healthcare and education are accessible to all, regardless of financial means. This promotes social equity and ensures everyone can benefit from essential services.
📖 Making Them Free to Access:
- Merit goods are often underprovided because they're unaffordable for many. By making healthcare and education free or subsidised, governments ensure equitable access, reducing socioeconomic disparities.
😊 Improving Welfare and Productivity:
- Access to merit goods such as healthcare and education enhances individual well-being, life expectancy, and productivity. Government intervention ensures these services are available universally, contributing to societal advancement.
An example of government intervention of a merit good:
This graph shows how much each country in the UK spends on healthcare per person each year. The rise in expenditure highlights the government’s commitment to funding healthcare, a classic example of a merit good.
- Increasing Expenditure: The graph shows that health expenditure per head has been increasing over the years across all countries in the UK. This indicates a growing investment in healthcare services.
- Government Intervention: This increasing expenditure represents government intervention to ensure that everyone has access to healthcare, regardless of their ability to pay. This is crucial for maintaining public health and economic productivity.
- Societal Benefits: By funding healthcare, the government ensures that the entire population benefits from improved health outcomes. This leads to a more productive workforce and reduces the economic burden of untreated illnesses
What are public Goods?
- This means that no one can be excluded from using them, and one person's use of the good does not reduce its availability to others.
- Because private companies cannot easily charge for public goods, they are typically under-provided by the market, leading to the need for government provision.
What are examples of public goods?
- Street Lighting 💡: Once installed, street lighting benefits everyone in the area and cannot be restricted to paying customers. Governments usually fund street lighting to ensure public safety and convenience.
- National Defence 🛡️: The protection provided by a country's military benefits all citizens equally, and no one can be excluded from this protection. It is funded through taxes and provided by the government to ensure national security.
Why would the government intervene to provide public goods?
- Public goods, like street lights and national defence, are non-excludable and non-rivalrous. Private firms won't supply them because they can't charge individuals for their use, leading to the 'free rider' problem. Government intervention ensures these goods are provided universally, benefiting all members of society without exclusion.
🏛️ Maximising Welfare:
- By providing essential public goods such as police services and infrastructure like street lights, governments maximise societal welfare. These goods enhance public safety, reduce crime rates, and mitigate accidents, contributing to overall well-being and quality of life for citizens.
🚓 Ensuring Essential Services:
- Services like police protection and street lighting are essential for public safety and urban infrastructure. Government provision ensures these services are adequately funded and maintained to safeguard communities, prevent crime, and create safer living environments for residents.
You may be wondering hmm, what makes education and healthcare not a public good? It is easy to get them mixed up! 👇
- Excludability: Education and healthcare can limit access based on payment or qualifications.
- Rivalry: Use by one person can reduce availability for others due to finite resources.
- Government Intervention: Governments ensure fair access because these goods are essential but costly to provide.
- Public Goods Contrast: Public goods are available to all simultaneously without diminishing in availability.
Understanding these distinctions clarifies why education and healthcare are considered merit goods, requiring government intervention for equitable access and optimal societal benefits.
Summary Table: Merit Goods vs. Public Goods
Feature | Merit Goods 🎓🏥 | Public Goods 💡🛡️ |
Definition | Beneficial goods under-provided by the market | Goods that are non-excludable and non-rivalrous |
Examples | Education, Healthcare | Street Lighting, National Defence |
Provision | Often provided or subsidised by the government | Typically provided by the government |
Reason for Under-Production | People might not afford them, even though they benefit society | Firms cannot easily charge users, leading to free-rider problem |
Impact on Society | Leads to a more educated, healthier population | Ensures public safety and security |
Knowledge checkpoint: Explain why the government intervenes to provide public goods
Knowledge checkpoint: Explain why the government intervenes to provide merit goods
Market failure
👉 Did you know that these are all examples of market failure? It happens all around us, and this is because sometimes the market doesn’t allocate resources in the most efficient way.
👉 Market failure can lead to pollution, public goods problems, and even unfair monopolies. Let's explore why this happens and what we can do about it!
What are the types of market failure?
Let’s explore these types in more details and why they lead to market failure👇
📉 The Over-Provision/overconsumption of Demerit Goods
Demerit goods are things like junk food, alcohol, and cigarettes that can harm people's health.When there is an over-provision of a good, it means that these goods are provided/produced more than is necessary.
Companies often produce too much of these because they can make a lot of money, even though they are bad for society.
👉 This is a market failure because the market is overproducing goods that have harmful effects, rather than allocating resources to more beneficial products.
Example: Despite public health campaigns, cigarette companies sell millions of packs each year.
- “The annual cost to NHSScotland of treating smoking related diseases is estimated to exceed £300m and may be higher than £500m each year”
The market fails here because it prioritises profits over public health, leading to increased healthcare costs and reduced productivity.
🚫 The Under-Provision/Non-Provision of Public Goods
Public goods like clean air, parks, and street lighting benefit everyone, but private companies cannot charge users directly for them, leading to under-provision or non-provision.👉 This is a market failure because the free market doesn’t supply enough of these essential services, resulting in societal inefficiencies.
Example: The maintenance of public parks in Scotland, like Holyrood Park in Edinburgh, is funded by the government because private companies wouldn’t provide them for free, even though everyone benefits from having green spaces.
🏥 The Under-Provision of Merit Goods
Merit goods like education and healthcare are beneficial to individuals and society, but if left to the free market, they may be under-provided because not everyone can afford them.👉 This market failure occurs because society benefits from widespread access to these services, which the market alone does not ensure.
Example: In Scotland, the government provides free education and free prescriptions. If these were left to the market, many people might not be able to afford school or necessary medicines, leading to worse health and education outcomes for society.
🏢 Monopoly Power
When one firm dominates a market, it can lead to reduced choices for consumers, higher prices, and poorer quality products.👉 This is a market failure because the monopolistic firm has too much control, leading to inefficiencies and a lack of competition.
Example: The UK energy market has faced criticism for being dominated by a few large companies, leading to higher energy bills and less innovation.Ofgem, the UK energy regulator, has had to intervene with a price cap to ensure fair competition. www.ofgem.gov.uk
🌫️ Negative Externalities
Negative externalities are costs that businesses do not account for in their production processes, which end up affecting other people or the environment.👉 This is a market failure because the true costs of production are not reflected in the price of the goods, leading to overproduction and societal harm.
Example: Industrial pollution in the River Clyde has been a historical issue, impacting local wildlife and communities. Efforts to clean up the river have been ongoing, but the cost of pollution cleanup often falls on the government and taxpayers.
🌿 Positive Externalities
Positive externalities are benefits to society that occur when a good or service is produced, but the market may not provide enough of them.👉 This market failure happens because the market undervalues these goods, resulting in underproduction.
Example: Did you know that if you are under 22, your option to travel by bus for free in Scotland is an example of government intervention to address a positive externality?When the government provides free bus travel for young people, it encourages more people to use public transportation. This reduces traffic congestion, lowers pollution, and promotes greater mobility for young people to access education, work, and social activities. Without government support, fewer young people might afford bus fares, leading to more cars on the road and increased pollution.
⚖️ Wealth/Income Inequality
Wealth and income inequality occur when resources are not shared equally, leading to some people having much more than others.👉 This is a market failure because it leads to an inefficient allocation of resources, where wealthier people have access to more resources than others, reducing overall societal welfare.
Example: In Great Britain, there is significant wealth disparity, with the richest 10% of households owning 45% of total wealth compared to the bottom 50% of households owning only 9% of total wealth!
- This can lead to social problems and inefficient use of resources.
🧩 Lack of Information
Sometimes, producers know more about a product than consumers, leading to people making poor choices.👉 This is a market failure because unequal information leads to inefficient market outcomes where consumers cannot make fully informed decisions.
Example: In the UK, the used car market often has issues with "lemon" cars (faulty used cars). Buyers may not know about hidden problems, leading to costly repairs.“It estimates that 750,000 consumers a year face unresolved problems with a used car purchase.” read more here 👇
Knowledge checkpoint: Other than income inequality, describe 4 different types of market failure.
Government Intervention to Correct Market Failure
- Remember, the reason for government intervention is to ensure that essential services are accessible to everyone, correct inequalities, and enhance overall societal welfare.
What are the different types of government intervention to correct market failure?
Using Taxes 💰
Governments use taxes to reduce negative externalities (unintended harmful effects) caused by certain goods and services. By taxing these goods, they make them more expensive and discourage their use, aiming to reduce the negative impacts on society.Example: The UK government imposed a tax on sugary drinks which is known as the ‘Soft Drinks Industry Levy’ to reduce sugar consumption and improve public health. It became effective in April 2018.👉 The below article found that the tax led to an 18% reduction in volume sales of levied brands due to the increased price that consumers had to pay (which therefore reduced demand!)
Providing Public and Merit Goods 🏥📚
Public goods (like street lighting) and merit goods (like healthcare and education) are often underprovided by the market because they are non-excludable and non-rivalrous or are unaffordable for many people.👉 Governments provide these goods to ensure everyone has access, thus correcting market failure by ensuring equitable provision and maximising societal benefits.
Examples:
- 🏴 Scotland: The Scottish Government provides free university tuition to ensure all students can access higher education.
- 🇺🇸 USA: Public libraries in the USA provide free access to books and internet services, promoting literacy and learning.
Legislation 📜
Governments pass laws to regulate activities that cause market failures, such as environmental regulations to reduce pollution.👉 This ensures that businesses and individuals act in ways that do not harm others, correcting the failure by aligning private actions with the public good.
Example: The Clean Air Act 1993 in the USA regulates air emissions from stationary and mobile sources to ensure air quality standards are met.
Quotas 📊
Quotas limit the amount of a certain good that can be produced or consumed, helping to control overuse and protect resources.👉 This intervention corrects market failure by preventing the depletion of natural resources and maintaining ecological balance.
Example: Fishing quotas in UK waters help prevent overfishing and protect marine ecosystems.
- In below article it mentions thatThe Common Fisheries Policy (CFP) set quotas on the amount of fish that could be caught to protect fish stocks.
- With Brexit, the UK's Trade and Cooperation Agreement with the EU includes specific quotas to gradually reduce EU fishing in UK waters, transferring a quarter of the EU's fishing rights to the UK fleet over five years.
Subsidies 💸
Governments provide financial assistance to encourage the production and consumption of goods with positive externalities, like renewable energy.👉 Subsidies correct market failures by making beneficial goods more affordable and widely available.
Example:Scottish Government's Broadband Subsidy: The R100 Scottish Broadband Voucher Scheme (SBVS) is a subsidy provided by the Scottish Government to people living in rural areas to enable broadband access.
- This initiative ensures that even the most remote areas have access to high-speed internet, promoting digital inclusion and economic development.
- “A subsidy of up to £5,000 is available to all eligible premises and covers all direct installation costs, which is carried out by a registered supplier.”
Maximum Price 📉
A maximum price is a fixed price (Price ceiling) created by the government usually set BELOW the equilibrium market priceSetting a maximum price ensures essential goods remain affordable for everyone, preventing prices from rising too high.
👉 This corrects market failure by protecting consumers from exploitation and ensuring access to basic necessities.
Example: The UK government has set a maximum price cap on energy bills to protect consumers from excessive charges.Let’s go through an example to see how that works:Note that the government is saying, "The price of energy bills is too high! We need to put a cap below what people are currently paying for their energy bills". This means setting a limit on how much can be charged for energy bills, ensuring it remains affordable.
- It is crucial to remember that this cap is set below the market price. This keeps the prices down to make essential goods and services more accessible.
Minimum Price 📈
A minimum price is a fixed price (price floor) created by the government usually set ABOVE the equilibrium market priceA minimum price ensures producers can cover their costs and maintain a fair income, preventing prices from dropping too low.
“MUP is not a tax, but a price floor, which means that price increases result in additional revenue to sellers and not the government”fraserofallander.org
👉 This intervention corrects market failure by ensuring sustainable production and fair wages.
Example: Scotland has implemented a minimum unit price for alcohol in 2018 to reduce excessive drinking and its associated harms.Let’s go through an example to see how that works:The government is saying “The price of alcohol is simply too low! We want to raise it by implementing a minimum price which will be above what the price of alcohol is currently is and then and legally prices cannot fall below that level!”
- It is crucial to remember that this cap is set ABOVE the market price. This keeps the prices up to discourage excessive alcohol consumption.
Privatisation 🏢
Privatisation involves transferring public sector assets to the private sector to increase efficiency and innovation.👉 This corrects market failure by introducing competition and improving service quality.
Example: The privatisation of British Telecom (BT) in the 1980s improved telecommunications services and expanded access.
- Since privatisation, BT has significantly increased its service coverage, benefiting millions of customers.
Deregulation 📈
Deregulation removes government controls to encourage competition and efficiency in the market.👉 This corrects market failure by reducing barriers to entry and promoting innovation.
Example: The deregulation of the airline industry in the late 1970s led to lower fares and increased air travel options.“Robust competition among airlines have driven fares to historic lows since deregulation — down almost 50% (adjusted for inflation).”
Regulatory Bodies 🏛️
Regulatory bodies enforce standards and rules to ensure markets operate fairly and efficiently.👉 This intervention corrects market failure by protecting consumers and promoting fair competition.
Example: In the UK, Ofgem regulates the electricity and gas markets to protect consumers and promote competition.There are other types of regulatory bodies:
Renationalisation 🏢
Renationalisation involves bringing previously privatised industries back under government control to ensure public interest and service quality.👉 This corrects market failure by prioritising public welfare over profit.
Example: The UK government renationalised the rail operator Northern Rail to improve reliability and service quality. Read more below 👇
However... government intervention isn't all free! 🚫💸
- Costs to Taxpayers: Government interventions often require funding from taxpayers' money to implement policies such as subsidies or infrastructure projects.
- Potential Market Distortions: Interventions can sometimes create market distortions (like excess supply and excess demand), leading to inefficiencies or unintended consequences.
- Administrative Burden: Implementing and managing interventions can be complex and require alot of oversight, which can be costly and time-consuming.