1. Unit11.4B:Marketfailure and government intervention LO:Distinguish private and public goods and their characteristics and LO:Distinguish merit and demerit goods and their characteristics

2. LESSON OBJECTIVES 1. Describe characteristics of private goods and public goods and ask provide examples 2. Describe characteristics of merit goods and de-merit goods and ask provide examples 3. Identify possible externalities associated with both types of goods, and 4. Construct a diagram to illustrate how these goods might impact on market efficiency and cause market failure.

3. Private Goods DEFINITION  i.e. goods that can be identified as your possession.  You have ‘Property Rights’ права собственности over that good.

4. PRIVATE GOODS :CHARACTERISTICS 1. Excludable(“property rights”)  Consumers of private goods can be excluded from consuming the product by the seller if they are not willing or able to pay for it.  For example a ticket to the theatre or a meal in a restaurant is clearly a private good 2. Rivalry  With a private good, one person's consumption of a product reduces the amount left for others to consume and benefit from - because scarce resources are used up in producing and supplying the good or service.  Example: If you order the latest smartphone, that smartphone is no longer available to someone else.

5. EXAMPLES

6. PUBLIC GOODS DEFINITION: A “public good” is a product or service which benefits everyone in the community Pure public goods are not normally provided at all by the private sector because they would be unable to supply them for a profit

7. CHARACTERISTICS 1. Non- excludability неисключительность Person paying for the benefit cannot prevent anyone else from also benefiting or consuming the product- the ‘free rider безбилетники problem’ общественные блага Рынки не будут предоставлять такие товары и услуги на всех! например Полиция, уличное освещение, Неисключимость неисключительность Человек платит в пользу не может предотвратить никого из также пользуются - на «проблему безбилетника безбилетники ‘ 2. Non-rival consumption: Consumption of a public good by one person does not reduce the availability of a good to everyone else “This causes “free-rider” problem –ie. it means that people have a temptation to consume without paying! THIS RESULT IN “MARKET FAILURE”

8. EXAMPLES

9. PUBLIC GOODS AND MARKET FAILURE Pure public goods are not normally provided at all by the private sector because they would be unable to supply them for a profit. Thus the free market may fail totally to provide important pure public goods Government decide what output of public goods is appropriate for society. To do this, it must estimate the social benefit(ie.benefits to society) from the consumption of public goods. Problematic putting a monetary value on the benefits from for eg. street lighting and defence systems The electoral system provides an opportunity to see the public choices of voters.

10. Merit Goods & Demerit Goods DEFINITION:  goods and services where the social benefits exceed the private benefits  Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidised or  provided free at the point of use(eg. Vaccination) so that consumption does not depend primarily on the ability to pay for the good or service.  In groups of two, think of examples of each and why…. Потребление заслуг товаров дает социальные льготы или налагает социальные издержки. В группах по два, подумать о примерах каждый и почему....

11. MERIT GOODS- CHARACTERISTICS A merit good has two characteristic:  People do not realise the true benefit. For example, people underestimate the benefit of education or vaccinations.  Usually these goods have positive externalities. Therefore in a free market there will be under consumption of merit goods.

12. Merit Goods- Examples  nurseries,  schools,  colleges,  universities could all be provided by the market but would everyone be able to afford them? детские сады, школы, колледжи, университеты все они могут быть предоставлены рынок, но будет все смогут позволить себе их? Schools: Would you pay if the state did not provide them? Вы бы платить, если государство не предоставлять им?

13. Merit goods and market failure  Merit goods provide positive externalities but if left wholly to the private sector, it is likely that merit goods will be under-consumer and under-supply  Partly this is because individuals do not understand or appreciate the social benefits that can result from consumption of education and health services to name just two examples

14. Demerit Goods DEFINITION Society suffers from the consumption of these goods.  Goods and services provided by the market which are not in our best interests(“bad goods”)  The government normally tries to reduce consumption of de-merit goods  Merit goods are ‘good’ for you. De-merit goods are thought to be ‘bad’ for you  Activity: Provide some Examples

15. A demerit goods has two characteristics: 1.A good which harms the consumer. For example, people don’t realise or ignore the costs of doing something e.g. smoking, drugs. 2.Usually these goods also have negative externalities. Therefore in a free market there will be over consumption of these goods. De-Merit Goods: CHARACTERISTICS

16. De-merit goods- Examples  Smoking  Drinking  Taking drugs  Gambling

18. De-merit goods and market failure  De-merit goods create negative externalities which leads to a reduction in social economic welfare.  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

19. Market Failure рыночная неэффективность Definition: Where the market mechanism fails to allocate resources efficiently Где рыночный механизм не в состоянии эффективно распределять ресурсы

20. Or put simply  Markets can function inequitably  Markets can function inefficiently  Рынки могут функционировать несправедливо Рынки могут функционировать неэффективно

21. 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  Потребители не имеют адекватного технических знаний Реклама может вводить в заблуждение или неправильно информирует Решения часто основанные на прошлом опыте, а не в будущем знаний

22. Market Failure Market Failure occurs where:  Imperfect Competition  Несовершенная Конкуренция  Externalities  Внешние Эффекты  Incomplete Information  Неполная Информация

23. Market Failure Market Power:  Monopolies and oligopolies  Collusion  Price fixing  Supernormal profits  Barriers to entry  Монополии и олигополии сговор фиксация цен Сверхъестественные прибыль Барьеры входа

24. 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  брендинг Дизайнерские этикетки - они стоят в три раза дороже, но являются они в три раза качество? Информация Маркировка и продукт Which one is the ‘quality’ item and why?

25. Tragedy of the Commons(“Free- riders”) Трагедия общих земель  Because it is difficult to establish property rights there is the likelihood that this resource will be overused and destroyed.  Потому что это трудно установить права собственности есть вероятность того, что этот ресурс будет злоупотреблять и уничтожены.

27. Overfishing

28. Rubbish Island in Pacific Мусор Остров в Тихом океане

29. The Great Pacific Garbage Patch

30. ARAL SEA

31. 1973 1986

32. 2001 2004

34. "Smoking may become a reason of long and painful death".

35. "Smoking causes drug addiction"

36. " Smoking during pregnancy causes harm to your child".

37. "Smoking causes impotence".

38. 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.  Как может правительство ограничить потребление штрафных товаров? Как потребление заслуг товаров поощрять? Подумайте, как много способов.

39. 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

40. Market Failure External Costs  e.g. Pollution  traffic congestion,  environmental degradation  depletion of the ozone layer

41. One ton of industrial wastes per resident in Pavlodar oblast Одна тонна промышленных отходов на одного жителя в Павлодарской области  Tengri News March 2013

42. TYPES OF EXTERNATILITIES  NEGATIVE EXTERNALITIES A negative externality is a cost that is suffered by a third party as a result of an economic transaction Third-parties include any individual, organisation, property owner, or resource For example, no one owns the oceans and they are not the private property of anyone, so ships may pollute the sea without fear of being taken to court

43. POSITIVE EXTERNALITIES  External benefits -Benefits from production (or  consumption) experienced by people other than the producer (or consumer).  A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. For example, with healthcare, private treatment for contagious diseases provides a considerable benefit to others, for which they do not pay.

44. EXTERNAL COSTS AND BENEFITS IN PRODUCTION

45. EXTERNAL COSTS AND BENEFITS IN CONSUMPTION

46. Price Quantity0 Marginal Benefit = D Marginal Private Cost Marginal Social Cost + Marginal Private Cost Negative Externality P1 Pe P2

47. Price Quantity0 Marginal Benefit = D Marginal Private Cost Marginal Social Cost + Marginal Private Cost Negative Externality P1 Pe P2

48. 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

49. 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.

50. 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 where MSC = MSB оптимум

51. Market Failure External benefits  by products of production and decision making that raise the welfare of a third party  Внешние преимущества продуктами производства и принятия решений, которые повышают благосостояние третьей стороны

52. External Benefits Price Quantity Bought and Sold MPB MSC $5 100 Value of the positive externality (Welfare Loss) Socially efficient output is where MSC = MSB MSB $10 $6.50 140 Social Benefits

53. Market Failure Measures to Correct Market Failure  State Provision  Extension of property rights  Taxation  Subsidies  Regulation  Prohibition  Positive Discrimination  Redistribution of Income  Меры по исправлению провал рынка Государственный Предоставление Расширение прав собственности налогообложение Субсидии регулирование запрет Позитивная дискриминация Перераспределение доходов

54. 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)  Спортзалы и спортивные залы заслуга товар.... С помощью соответствующей диаграмме, объяснить, почему заслуга товары часто недоначислено. (8 баллов) или С помощью соответствующей диаграмме, объяснить, как налогообложение может уменьшить негативные внешние (загрязнение), вызванных заводов. (8 баллов)