PPT - Causes Of Market Failure
Outline the classification of goods
Private Goods
- Are rival and excludable
- for example, clothing, food.
Club Goods
- Are non-rival and excludable
Merit & Demerit Goods
Merit Goods
- Goods that are produced that have large external benefits for society
- Goods that will be underprovided in the economy if the product is left in the market
Demerit Goods
- Goods that are produced that have large external costs for society
- Goods that will be overprovided if left in the market
- Are private goods as they are both rivalry and exclusive
Describe the public goods and the free rider effect
Public Goods
- Non-rival and Non-excludable
- E.g. national parks, lighthouses, national defence
Free rider effect
- Public goods cause the free rider effect
- Free riders enjoy the benefits of the consumption of a resource without paying for the cost of provision
- This can lead to over-consumption and rapid damage of a public resource
Describe common resources and the tragedy of commons
Common Property Resources
- Are rival and non-excludable
Tragedy of Commons
- Common Property Resources lead to tragedy of commons
- Refers to the over-consumption of common property resources, e.g. over-fishing
- Occurs as the resource is readily available and there are no restrictions on consumption
- However, once consumed the resource is not available to any other party, leading to depletion of the resource.
- Common Property Goods: Enforce restrictions on consumption - e.g. fishing limits, no-fishing zones, fishing licenses, etc.
- Public Goods: Create ownership of the resource, e.g. fees for public transport, fines for damaging public property