1. 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.

2. Introduction to Market Failure Изъяны Рынка Внешние Эффекты и рыночная эффективность

3. Market Failure рыночная неэффективность
Definition: Where the market mechanism fails to allocate resources efficiently

4. Market Failure
Social Efficiency = where external costs and benefits затраты и выгоды are 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

5. Or put simply Markets can function inequitably
Markets can function inefficiently

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

7. Market Failure Market Power: Monopolies and oligopolies Collusion
Price fixing
Supernormal profits
Barriers to entry

8. 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

9. 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?

10. Private Goods i.e. goods that can be identified as your possession.
You have ‘Property Rights’ права собственности over that good.
It is therefore ‘excludable’ i.e. you can prevent other people from using it.

11. Tragedy of the Commons Трагедия общих земель
Because it is difficult to establish property rights there is the likelihood that this resource will be overused and destroyed.

13. Overfishing

14. Rubbish Island in Pacific

15. The Great Pacific Garbage Patch

16. ARAL SEA

19. 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?

20. 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….

21. 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?

22. 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

23. De-merit goods
Merit goods are ‘good’ for you. De-merit goods are thought to be ‘bad’ for you

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

26. "Smoking causes drug addiction"

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

28. "Smoking causes impotence".

29. 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.

30. 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

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

32. One ton of industrial wastes per resident in Pavlodar oblast
Tengri News March 2013

33. + Marginal Private Cost
Marginal Social Cost
+ Marginal Private Cost
Price
Marginal Private Cost P2
Negative Externality Pe P1
Marginal Benefit = D
Quantity

34. + Marginal Private Cost
Marginal Social Cost
+ Marginal Private Cost
Price
Marginal Private Cost P2
Negative Externality Pe P1
Marginal Benefit = D
Quantity

35. 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

36. 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.

37. 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

38. Market Failure External benefits
by products of production and decision making that raise the welfare of a third party

39. External Benefits Price Socially efficient output is where MSC = MSB
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

40. Market Failure Measures to Correct Market Failure State Provision
Extension of property rights
Taxation
Subsidies
Regulation
Prohibition
Positive Discrimination
Redistribution of Income

41. 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.