What is the definition of merit goods?
Merit goods are encouraged to consume becuase they have positive externalities as their social benefit is greater then their private benefit for example education or healthcare
What is the definition of demerit goods?
demerit goods are discouraged to consume because they have negative externalities as their social cost is greater then their private cost, for example smoking, alcohol
Why can merit and demerit goods cause market failure?
Because of imperfect information
-information failure: info is not present at all or people ignore information so people don’t understand the real cost or benefit from merit or demerit goods
-**asymmetric information **: information is not shared equally between buyer and seller
so lack of info on demerit goods can be overproduced and consumer and lack of info on merit goods means underproduced and consumed
What is an example of Asymmetric information when the buyer knows more?
-buyer knows they have health issue before buying insurance
What are the causes of asymmetric information?
1 - inertia: people pretend they don’t know the problem
2 - buyer want to underprice the product
3 - seller wants to overprice the product
What is the definition of public goods?
Goods which are non excludable and non rivalry for example street lights, road signs, flood defences.
What does Non excludable mean in regards to a public good?
No price can be charged for the good
and once it is offered to one it is offered to everyone, it can not be given only to one person becuase the benefit is to everyone
if one person pays for street lights others who don’t pay also get benefit
What does Non-rivalry mean in regards to public good?
one person can use the good without affecting how much another person can use the good
How can public goods cause market failure?
FREE RIDER PROBLEM
-Individual do not want to contribute to the provision of public goods because they only others can contribute and they can still use the goods as the benefits of a public good can not be confined to one person (one person pays for street lamp they can not stop the other people getting to use the same light if they don’t pay )
it means no one pays and no private incentive to supply so gov must supply
what are Quasi Public goods?
Goods which have the characteristics of public goods but can combat free rider problem as in peak goods consumer will pay
Roads - can be exculdable in peak times using toll roads
Buses - can be excludable during peak times if their full
What is social pareto efficiency?
Highest efficiency when you cant make something more efficient without making something else less efficient
What is allocative efficiency?
When can see welfare maximised on the PPF efficiency varies from one and another cause it depends on the person
What is productive efficiency?
The best method of production at the lowest possible average cost per unit every point on the PPF is productive efficient
