Public Goods
• Goods/services which are not produced at all through
the price mechanism because they exhibit:
- non-rivalry in consumption (one person consuming
some doesn’t make any less available for another to
consume)
- non-excludability in consumption (it is not possible to
prevent someone from benefiting from the good/service)
• Eg. defence, flood defences, street lighting, fireworks
displays
• So, no firm wants to provide these – there’s no money to
be made!
Problems of Public Goods
• Free Rider Problem: firms cannot withhold the goods from
those who refuse to pay…everyone waits for someone else to
pay…no one pays…no good provided
• Valuation Problem: it is difficult to measure the value to each
user - consumers tend to undervalue their use of public goods
Remedies for Public Goods
• Government Provision: gov’t tends to provide public goods
with funds from general taxation …everyone pays … everyone
can us them
• (without gov’t provision, these goods would be
“underprovided” or not provided at all)
Merit Goods
• A good which is underprovided by the price
mechanism because it tends to yield more value to
consumers then they realise
• Consumers would not be willing to pay a market
price for them if private firms provided the good
• (Each society has a different set of “merit goods”)
• Demerit Goods are those which are overprovided by
the market mechanism and have more negative costs
to consumers than they realise
Why Do Merit Goods Markets Fail?
• Lack of information and knowledge: people don’t
realise the full value of the good
• Long-term benefits: people tend to focus on shortterm benefit and many merit goods hold long-term
value
• Unequal distribution of income: people on low
incomes may not be able to afford the prices
determined in the overall market, and therefore
underconsume the good
Remedies for Merit Good Underprovision
(also used for external benefits)
• Gov’t provision: some goods may be provided free of charge
through general taxation (eg. NHS, state schools)
• Gov’t subsidies: some privately provided goods may receive
subsidies to allow the price to fall, increasing access to more
citizens (eg. symphony orchestras, art galleries)