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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. - PowerPoint PPT Presentation
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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.
Introduction toMarket FailureИзъяны Рынка
Внешние Эффекты и рыночная эффективность
Market Failure рыночная неэффективность
Definition:Where the market mechanism fails to allocate
resources efficiently
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
Or put simply
• Markets can function inequitably
• Markets can function inefficiently
Market FailureMarket Failure occurs where:• Imperfect Competition• Несовершенная Конкуренция
• Externalities• Внешние Эффекты
• Incomplete Information• Неполная Информация
Market Failure
Market Power:• Monopolies and oligopolies• Collusion• Price fixing• Supernormal profits• Barriers to entry
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 FailureGoods/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
• 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.
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.
Overfishing
Rubbish Island in Pacific
The Great Pacific Garbage Patch
ARAL SEA
1973 1986
2001 2004
Market FailurePublic 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
• Consumption of merit goods gives social benefits or imposes social costs.
• In groups of two, think of examples of each and why….
Merit Goods• nurseries, • schools, • colleges, • universities could all be provided by themarket but would everyonebe able to afford them?
Schools: Would you pay if the state did not provide them?
Demerit Goods
De-Merit GoodsSociety suffers from the consumption of these
goods.• Goods and services provided by the market
which are not in our best interests! examplesTobacco and alcoholDrugsGambling
De-merit goods• Merit goods are ‘good’ for you. De-merit goods are thought to
be ‘bad’ for you
"Smoking may become a reason of long and painful death".
"Smoking causes drug addiction"
"Smoking during pregnancy causes harm to your child".
"Smoking causes impotence".
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 Failure
External Costs and BenefitsExternal or social costs• The cost of an economic decision to a third
partyExternal benefits • The benefits to a third party as a result of a
decision by another party
Market Failure
External Costs
• e.g. Pollution• traffic congestion,• environmental degradation• depletion of the ozone layer
One ton of industrial wastes per resident in Pavlodar oblast
• Tengri News March 2013
Price
Quantity0
Marginal Benefit = D
Marginal Private Cost
Marginal Social Cost
+ Marginal Private Cost
Negative Externality
P1
PeP2
Price
Quantity0
Marginal Benefit = D
Marginal Private Cost
Marginal Social Cost
+ Marginal Private Cost
Negative Externality
P1
PeP2
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
• 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.
Внешние Эффекты Производство
Price
Quantity Bought and Sold
Cпрос частная ценность
Предложение (частные издержки)
£5
100
MSC + MPC
£12Издержки загрязнения
£7
80
Socially efficient output is whereMSC = MSB
оптимум
Market FailureExternal benefits • by products of production and
decision making that raise the welfare of a third party
External BenefitsPrice
Quantity Bought and Sold
MPB
MSC
$5
100
Value of the positive externality (Welfare Loss)
Socially efficient output is whereMSC = MSBMSB
$10
$6.50
140
Social Benefits
Market FailureMeasures to Correct Market Failure• State Provision• Extension of property rights• Taxation• Subsidies• Regulation• Prohibition• Positive Discrimination• Redistribution of Income
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)