10/11/15
Lesson 1: Types of Market Failure
Learning Objective: I can explain and give examples of, merit goods, demerit goods, and public goods.
DA: In your opinion, explain which government interventionist policy from chapter 5 is most sensible.
DA: In your opinion, explain which government interventionist policy from chapter 5 is most sensible.
It's important to understand that market aren't perfect in the "real world". There are a number of things that prevent markets from being perfect and, therfore, from allocating resources optimally, i.e., community surplus is not maximized.
Types of Market Failure:
Lack of public goods - Goods that would not be provided at all in a free market. Public goods are a benefit to society. Therefore, lack of public goods in a free market is considered to be a market failure. Ex. National defense and flood barriers. It's no surprise that there's much debate over what is actually a public good and what is not. The reason public goods will not be provided at all in a free market is that they have two characteristics:
Non-excludable
|
Non-rivalrous
|
Look over the following example:
Activity: With a partner, create your own matrix with three goods/services for each box.
Government may try to reduce market failure by intervening in a number of ways:
- Provide public good themselves, i.e., national defense, flood barriers, roads, street lighting, and lighthouses. Use of taxpayers' money to fund the provision spreads the cost over a large number of people.
- Subsidize private firms, covering all costs, to provide the good.
Download the following document for additional practice:
Under-supply of merit goods
|
Over-supply of demerit goods
|
Activity: Write a half-one page response to the following question: To what extent should the government be responsible to increase the supply of merit goods and decrease the supply of demerit goods? Please take into consideration the concept of free markets, choice and incentives.