Governments intervene in markets to try and overcome market failure. The government may also seek to improve the distribution of resources (greater equality). The aims of government intervention in markets include Stabilise prices Provide producers/farmers with a minimum income To avoid excessive prices for goods with important social welfare Discourage demerit goods/encourage merit good Forms …
Definition of Merit Good A merit good has two characteristics: People do not realise the true personal benefit. For example, people underestimate the benefit of education or getting a vaccination. Usually, these goods also have a positive externality. Therefore in a free market, there will be under consumption of merit goods. Examples of Merit Goods …
A demerit good is defined as a good which can have a negative impact on the consumer – but these damaging effects may be unknown or ignored by the consumer. Demerit goods also usually have negative externalities – where consumption causes a harmful effect on a third party. Examples of demerit goods Alcohol Cigarettes Drugs …
To overcome market failure, the government can use various policies. For example, to reduce consumption of demerit goods, they can increase taxes. Policies to overcome market failure Taxes on negative externalities Subsidies on positive externalities Laws and Regulations Electronic Road Pricing – a specific tax related to congestion Pollution Permits – giving firms the ability to …
Social benefit is the total benefit to society from producing or consuming a good/service. Social benefit includes all the private benefits plus any external benefits of production/consumption. If a good has significant external benefits, then the social benefit will be greater than the private benefit. Examples of social benefit If we cycle to work, the …
Definition of social efficiency. This is the optimal distribution of resources in society, taking into account all external costs and benefits as well as the internal costs and benefits. Social efficiency occurs at an output where Marginal Social Benefit (MSB) = Marginal Social Cost (MSC). Social efficiency is closely related to the concept of Pareto …
Negative externalities occur when the consumption or production of a good causes a harmful effect to a third party. Examples of negative externalities Loud music. If you play loud music at night, your neighbour may not be able to sleep. Pollution. If you produce chemicals and cause pollution as a side effect, then local fishermen …
Externalities occur when producing or consuming a good cause an impact on third parties not directly related to the transaction. Externalities can either be positive or negative. They can also occur from production or consumption. For example, just driving into a city centre, will cause external costs of more pollution and congestion to those living …