Market failure refers to a situation where the free market fails to achieve an outcome that maximises society’s welfare. Such a society is said to be allocatively inefficient. This paper delves into detail regarding the difference between public goods and merit goods, using examples from the UK.
A public good is defined as a good that is non-excludable and non-rival; non-excludable means that it is impossible to prevent someone who has not paid from consuming the good while non-rival means that the consumption of the good by one person does not diminish the amount or quality available to others.
On the other hand, a merit good refers to a good in which the state believes will be under-consumed if left to the free market, because some individuals are unable to factor in the full private benefits of consumption. This means that the perceived marginal private benefit is less than the actual marginal private benefit and the good is under-consumed.
Due to the non-excludable and non-rivalrous characteristics of public goods, consumers are unwilling to pay because they are able to enjoy the benefits as “free-riders”. Firms are unable to charge a price and so they find the good unprofitable to produce. Under a free market, production does not occur and total market failure arises.
When this happens, the government must fully finance the production of the good in which the cost of financing such good is funded from general taxation. In the case of UK, the flood control defence is funded by the government. It is non-excludable as people in the country who did not pay for the flood control system will get to enjoy the same level of safety from floods. It is non-rivalrous too as such security against these natural hazards does not diminish even if the population increases.
Merit goods may also exhibit positive externalities, or alternatively, due to imperfect information, may be under-consumed as a result. Thus, society’s welfare is not maximised. To correct such market failure, the government must raise consumption through subsidies. In the case of the UK, the entry to national museums and art galleries is free and tickets to the opera are subsidised as the government recognizes the under consumption of art among the people. Individuals may fail to factor in the private benefits of consuming such a good such as providing an alternative form of escapism from the hectic life of city dwellers through the appreciation of art. To raise the consumption, the UK government subsidizes the entry tickets to art galleries to point of being free so as to raise the overall welfare of the society.
Public goods defer from merit goods as the former exhibit non-excludability and non-rivalrous characteristics. On the other hand, the latter are private goods which exhibit excludability and rivalrous characteristics. Merit goods are provided by private producers as they are able to set a price on the good. There is no “free-riders” problem in the case of merit good whereas there exists such a problem in the case of public goods. As such, a public good is provided by the government directly whereas merit goods tend to be subsidised or partially provided. The argument on merit good focuses is more on individuals undervaluing private benefits while the “free-riders” problem plays a significant role in the argument on public good.
JC Economics Essays - Economics Tutor's Comments: This is a simple, clear cut, and well presented Economics essay that is fairly accurate, direct, and to the point. This essay addresses the question posed directly. However, the usual question applies: how could you improve upon this Economics essay to make it better, or even more accurate or precise? How could you further develop the essay's paragraphs? Special thanks to S YQ for this excellent piece of economic writing. Thanks for reading and cheers.
