Transcript Merit_De-merit_Goodsx

Merit & De-merit Goods:
a case of market failure
Learning objectives
understand what merit & de-merit
goods are & how the government
might intervene
Merit Good
• A good that brings unanticipated benefits to its
consumers, such that society believes that it
should be consumed by individuals regardless of
whether they have the means or the willingness
to do so
• A good which is underprovided by the market
mechanism
Why is it underprovided?
• Individuals lack perfect information & find it
difficult to make rational decisions when costs
occur today but the benefits may be received in
many years’ time
• A good that is better for a person than the person
who consumes the good realises
• Significant positive externalities exist
Examples
• Health
• Education
• Insurance
Merit Good
• Divergence between the marginal benefit that
individuals perceive to arise from consuming a
good, and the social benefit that accrues from its
consumption
Costs,
MSB is greater than MPB
Benefits
MC
MSB
MPB
Q1
Q*
Quantity
De-merit good
• Goods that are worse for the individual consumer
than the individual realises
• E.g cigarettes – when a person makes a decision
to smoke a cigarette, he or she is not fully in
possession of the information concerning the
harmful effects of smoking
• Unlike negative externalities, it is a de-merit good
due to the unperceived damage to the person
consuming the product, not the damage to others
De-merit definition
• A good that brings less benefit to consumers than
they expect, such that society believes that it
should not be consumed by individuals regardless
of whether they wish to do so
Costs,
Benefits
MC
MSB is lower
than MPB
MPB
MSB
Q*
Q1
Quantity
Alcohol
• BBC news clip
Solutions?
• Do you think the government should intervene to
correct the market failure for alcohol?
• How should the government intervene?
Solutions?
• Possible solutions to market failure in the case of:
• Public goods
• Merit goods
• De-merit goods
Methods
• Manipulation of the market mechanism
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Subsidies
Indirect taxation
Provision of information
i.e. Market based solutions
• Non-market methods
• Direct provision
• Various forms of regulation & control
Taxation
• Charge levied by central & local government on
firms & consumers in the UK
• Direct tax
• e.g. Income tax, corporation tax, national insurance
contributions (taxes on incomes on individuals &
firms)
• Indirect taxes,
• e.g. VAT, excise duties, council tax, business rates
• Income tax is the largest contributor to the
Treasury
Hypothecation
• = a situation where a particular tax is explicitly
earmarked for a particular form of government
spending
• There is little or no hypothecation
Tax revenue spending
• Considerable amount is needed to finance merit
goods & public goods
• Health & education (merit goods/services) are the
second & third largest areas of government
spending
• Where do taxes get spent?
Price
Supply + tax
Supply (MPC)
TAX
Demand
(MPB)
MSB
Q*
Q1
Quantity
Tax – who pays?
• Producer or consumer?
Taxation
Demand Elastic
Demand Inelastic
Price
Price
S + tax
S + tax
C
S
S
C
A
A
D
D
0
Quantity
D
D
0
Quantity
Indirect taxes like VAT shift the supply curve to the left
Tax is shown by the vertical distance between the two supply curves – CD
Consumer pays CA – Supplier pays AD
Polluter pays principle
• Any measure, such as a green tax, whereby the
polluter pays explicitly for the pollution caused
• But ...
• Exact amount of tax?
• Burden shared with consumer
• Price elasticity of demand – consumption may not be
reduced by as much as intended
• Better quality of information for consumers may be
used to further reduce consumption
Subsidy
• A payment, usually from government, to
encourage production or consumption
• Purpose is to reduce cost in order to provide a
higher level of production or consumption than if
left to free market
Examples
• Producers
• Payments to bus companies running loss-making
services in rural areas
• Payments by the EU to farmers
• Grants from the UK & EU to firms relocating or
setting up business in deprived areas
• Consumers
• Winter fuel payment to people aged 60+
• Educational maintenance allowance
SUBSIDIES
Price
Supply (MPC)
Supply with
subsidy
P1
P*
MSB
Demand (MPB)
Q1
Q*
Quantity
Regulations, standards &
legal controls
• Examples include:
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Environmental – emission of pollutants
Transport – use of seatbelts
Professional regulations – doctors qualifications
Restrictions on sale of demerit goods
• Purpose is to over-ride the workings of the
market mechanism
Government’s role in
information provision
Health warnings on cigarette packets
Advice on maximum number of alcohol units
Improved food labelling – traffic light system
Advice on consumption of junk food & links to
child obesity
• Advertising Standards Agency
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