A-Level Microeconomics 6 - Merit And Demerit Goods

A good that is over-consumed and overproduced in the market economy. The price mechanism allocated more resources to their production than is socially desirable.

Alcohol, cigarettes, car use.

A good that is under consumed and underproduced in a market economy. The price mechanism allocated fewer resources to their production than is thought socially desirable.

Private foods are rivalrous - consumption by one person leads to less of the good being available for others to consume.

Private goods are excludable - once provided, it is possible to prevent others from consuming the good.

Non-rivalrous - consumption of the good by one person dies not reduce the amount available for others to consume.

Non-excludable - once provided, no person can be prevented from consuming them.

Non-rejectable - once provided, it is impossible to reject consumption of the good.

Zero

Most goods are private goods. Very few goods are pure public goods.

Police, defence, street lighting, air.

It is impossible to prevent people recieving the benefits of a public good once it has been provided. This men's that there is little incentive to pay for consumption of the good. A free rider is someone who receives the benefit from consuming a good or service but let's others pay for it. Individuals can increase their welfare by not paying for public goods.

The presence of free riders in a market causes market failure, and public goods to be under-provided by the market.

In a free market economy, national defence would not be provided. The firm providing defence cannot charge for the product as it does not benefit individual citizens. No-one would Aly fir defence so the market would not provide it.

The state provides man public goods and covers it's costs through taxation.

A good which shares some characteristics with public goods, but which firms can generally exclude consumers who haven't paid from consuming.

Toll roads, TV subscriptions.

Some goods which are non-rival (such as country roads) will not be profitable to provide for firms and so will be under-provided in the free market.

For markets to be fully competitive, all consumers and producers need to enjoy perfect (complete and costless) information.

Yes.

Inacurate or incomplete information (e.g. advertising).

Uncertainty of information (e.g. about future benefits of pensions).

Misunderstanding (e.g. scientific research).

Complex information (e.g. buying a phone contract).

Asymetric information (e.g. Akerlof's lemons).

When one agent in an economic transaction has more information about a good o service than another and uses this to their advantage.

When an economic agent who has superior knowledge leaves the market altogether. This can lead to markets ceasing to exist altogether.

E.g. highly productive workers, low risk insurees, people who own above average quality second hand cars).

When one person takes more risks because someone LSE has agreed to bear the burden of those risks.

E.g. health insurance, central banks 'rescue packages'.

Adverse selection - this occurs when only those at greatest risk take out insurance. Those who are most likely to fall ill, or who have been ill previously, are most likely to take out health insurance. Insurers may not have full information to correctly set premiums.

Moral hazard - occurs when those who take out insurance change their behaviour once they are insured. There is a temptation to take more risks when the risk is borne by a 3rd party (e.g. an insurance company). As a result, insured people become less concerned with protecting their health.

Trial periods/warranties and guarantees/independent checking

Advertising standards

Provision of information/education

Tax incentives and subsidies