TOPIC: FOR GRADE 12B A2
Analyse what might be done when market failure does exist.
Time Duration for submitting the Article is
April 1 to 7, 2013
Name Reasons
Wilson: Public goods
Alyssia: Merit Goods
Fernando: Demerit Goods
Alex: Market Imperfections
Bella: Information failure
Write your opinion here in 500 Words. [20 Marks]
"Marks allocation will be in accordance to the Rubrics"
Note: I will give zero if your writing are not in accordance to the rubrics mentioned by me.
Analyse what might be done when market failure does exist- demerit goods [20]
ReplyDeleteMarket failure occurs whenever markets fail to deliver an efficient allocation of resources and the result is a loss of economic and social welfare. It usually occurs when producers of a particular country is not capable to meet expected demand, or there is no demand for the product itself. market failure for demerit goods occur when the prices paid for the goods we consumed dont reflect the true value of the costs of production or the benefits derived from the consumption, the social cost will exceeds the private cost, leading to misallocation of resources. demerit goods like alcohol, illegal drugs, and cigarettes have negative externalities. For instance when someone take drugs, neighbours would feel insecure or something like that or there are possibilities that he or she would influence the surrounding people to buy drugs too. Another example would be the pollution caused by smoking cigaretes, people around the smoker will become passive smoker and might increase chances of getting lung cancer . demerit good therefore, are overproduced or overconsumed, leading to the misallocation of resources. to overcome this problem, The government may decide to intervene in the market for these goods and impose taxes on producers and / or consumers. Higher taxes cause prices to rise and should lead to a fall in demand. The additional costs of demerit goods are there for all to see:, increased crime, they will do whatever it takes to get the demanded product even like doing crime and the fact that labour productivity is affected in a negative way people tend to be demotivated, they will find it hard to concentrate on their work since they are keep on thinking about the products that are bad for their health, which is bad for the economy as a whole. However, having a huge amount of demerit goods in the society could benefit the country itself, for instance, when a government imposed higher tax on demerit goods, the govt's revenue will absolutely be increasing, so therefore a higher revenue might increase governtment spending like health care, pensions and retirement program, spending on army forces such as weapon and soldiers, Infrastructure and services like education, fire services, police, spending on physical infrastructure including transportation, spending on science,or even on technology. but still, the damage created by Demerit goods would not be worth the benefits. even in the long term, Demerit goods can ruin people's lives in that country. such as life expectancy,the life of people who smoke will not be as long as people who do not smoke. So in my opinion, the causes of demerit goods in the society will be huge since people are overestimating the benefits derived from the goods leading to a fail in the market. especially when the demand has exceeds certain level, even with increasing the price for the goods, people will still be buying that particular product.
Wilson:
ReplyDeletePublic goods are goods that are produced by the government. Private sector which have an objective of maximising profit is not willing to produce those goods as it's not profitable. As a result, public goods are often underprovided in the free market. Then, it is one of the reason for market to fail. Market failure means market mechanism does not give an efficient allocation of resources.
Goods can be catagorized as public goods if they have these characteristics:
A) Non-Excludable. This means that once the good has been provided for one consumer, it is impossible to stop all other consumers from benefiting from the good. For example: Dam to stop flood, providing law and order
B) Non-Rivalry. This means that when a good is consumed, it doesn't reduce the amount available for others. For example: benefiting from a street light doesn't reduce light for others.
However, it's impossible to define goods as purely private or public goods. Some goods are not fully have the two characteristics stated above. Its called Quasi-public goods. It is closer to the class of public goods than to private goods but are not fully public goods. For example: People going to mall on holiday. It's impossible to restrict the penniless to enter to the mall. But, as it's on holiday an very crowded, people's conversation become more audible. Enjoyment might be reduce thus the mall is not purely non-rivalry.
Problem created by public goods is the market may fail to produce them at all. This is due to free rider. Free rider is someone who has no incentive to pay for the use of a public good because they can consume them without paying for it. They tend to gain a free ride on someone's purchase without paying any cost. Why is this possible? Go back to the characteristics of public goods. Non-Excludable are there, it's impossible to restrict the non-buyer not to use the product. For example: National Defense. A country must defend their resident from threat of foreigners. Army must be trained, war equipment such as gun, tank, and other weapon must be produced/ imported. Where government get the money from? It's from salary taxes of their resident. However, not all of us are in the working age ( sometimes 15-65 ) or some of us are unemployed ( willing to work but can't get any jobs ). These people are not paying salary taxes but they still protected by the same common resource of national defense. The non payers of tax gain free ride on those who pay the tax. This can discourage someone to fight for a job as to be employed or unemployed, they will still be protected. It is impossible to charge every person for this protection and so private sector will not willing to produce the service. As a result, government takeover this and provide this service for everyone at zero cost.
Merit goods are goods that are under-produced or under-consumed in the free-market economy. These are under-consumed because of consumers only take into account private benefits when consuming merit goods and these are short-term utility and so it is not long-term benefits of consuming merit goods. Merit goods generate positive externalities (an externality being a third party which comes from the consumption or production of goods and services) or generate greater benefits to individuals than they realized which means divergence between private benefit and public benefit (public benefit is greater than private benefit). When it is under-consumed then market failure (where the allocation of goods and services are not efficient) happen.
ReplyDeleteUnlike private goods, the net private benefit to the consumer is not fully recognized at the time of consumption. Net consumer plus is when the utility gained from the consumption less any private cost. Used education as an example, students don’t know exactly what are the private benefits of getting good grades. But they will aware when they have a high wages, etc. Therefore, with education, there are information failures in term of expected benefit. When a consumption of merit goods produced external benefits to the society, this is unlikely to be recognized at the point of consumption. Usually student is not motivated to study hard because they don’t recognize the benefit to others in the future. The better job that person have, the more tax that person have to pay, the greater benefits to those who receives welfare benefits. However, estimate the external benefits value is impossible.
Markets frequently fail to allocate resources to the production of merit goods, so government needs to intervene and solve this market failure. Government should do some actions due to solve these market failure problems. Rise in price will cause an increase in the supply, but it’s reduces demand in merit goods. But by producing subsidy from the government will increase both supply and demand. Government chooses to set a minimum price or price flooring. In harvest season, the market equilibrium will fall and by setting the minimum price, the price will still acceptable. There will be a surplus that can be called as a buffer stock, which means stock that can be used for backup. Government tends to give subsidy to the consumers not the producers. This will lead to efficiency. Government could set a maximum price or price ceiling. If market set the maximum price, poor society can’t afford to but goods because the maximum price will be high. But government cares about poor society, so they put a lower maximum price, as long as the poor society could afford to buy things. There are also some rules and regulation. Whenever government allocates resources, public sectors managers and employees may act in their own interest. By set a regulation, such as education standard will produce more competitive in environment.
So, government intervention is used to encourage increased consumption of merit goods. It might reduce the private costs of consumption and cause an increased in demand. Higher government spending on these merit goods should produce a positive social rate of return, which leads to an improvement in total economic welfare.