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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.

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holiday work
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
Introduction toMarket FailureИзъяны РынкаВнешние Эффекты и рыночная эффективность
market failure
Market Failure рыночная неэффективность

Definition:

Where the market mechanism fails to allocateresources efficiently

market failure1
Market Failure
  • Social Efficiency = where external costs and benefits затраты и выгодыare 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
Or put simply
  • Markets can function inequitably
  • Markets can function inefficiently
market failure2
Market Failure

Market Failure occurs where:

  • Imperfect Competition
  • Несовершенная Конкуренция
  • Externalities
  • Внешние Эффекты
  • Incomplete Information
  • Неполная Информация
market failure3
Market Failure

Market Power:

  • Monopolies and oligopolies
  • Collusion
  • Price fixing
  • Supernormal profits
  • Barriers to entry
imperfect knowledge asymmetry of information
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 failure4
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
Private Goods
  • i.e. goods that can be identified as your possession.
  • You have ‘Property Rights’ права собственностиover that good.
  • It is therefore ‘excludable’ i.e. you can prevent other people from using it.
tragedy of the commons
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.
market failure5
Market Failure

Public 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
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
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
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
De-merit goods
  • Merit goods are ‘good’ for you. De-merit goods are thought to be ‘bad’ for you
activity 5 minutes
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 failure6
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 failure7
Market Failure

External Costs

  • e.g. Pollution
  • traffic congestion,
  • environmental degradation
  • depletion of the ozone layer
slide33

Marginal Social Cost

+ Marginal Private Cost

Price

Marginal Private Cost

P2

Negative Externality

Pe

P1

Marginal Benefit = D

0

Quantity

slide34

Marginal Social Cost

+ Marginal Private Cost

Price

Marginal Private Cost

P2

Negative Externality

Pe

P1

Marginal Benefit = D

0

Quantity

marginal cost curve
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
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.
slide37
Внешние Эффекты Производство

оптимум

Price

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 failure8
Market Failure

External benefits

  • by products of production and decision making that raise the welfare of a third party
external benefits
External Benefits

Price

MSC

Value of the positive

externality(Welfare Loss)

$10

Social Benefits

$6.50

Socially efficient output

is where

MSC = MSB

$5

MSB

MPB

100

140

Quantity Bought and Sold

market failure9
Market Failure

Measures to Correct Market Failure

  • State Provision
  • Extension of property rights
  • Taxation
  • Subsidies
  • Regulation
  • Prohibition
  • Positive Discrimination
  • Redistribution of Income
homework
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)