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Allocate
resources
efficiently
Markets fail
to
Provide goods to
benefit society
Stop production
and consumption
of harmful goods
Public, Merit
and Demerit
Goods
Lack of
Competition
Income
Distribution
Causes of
Market
Failure
Information
Failure
Externalities
Abuse of
Market
Power
Government Intervention
Seeks to ensure:
•
•
•
•
•
•
All can benefit,
Efficient functioning of markets
Desirable market outcomes
Better allocation of resources,
Fairer distribution of income
Greater economic stability
However:
Too much government intervention –
limits innovation, efficiency and growth
Too little – leave consumers exposed
to instability, inequality and lack of basic
community facilities
Why does the government
provide goods and services?
• It needs to satisfy consumer needs e.g.: ABC
television and radio in the country areas
• It needs to provide what private sector cannot
provide or will not provide. Private sector will only
provide if it can make a profit
• Infrastructure, the government will need to provide
basic infrastructure such as roads, railways, parks,
water supply, bridges, broadband internet etc.
to allow the economy to grow and develop.
What are public goods?
• A good which once provided is difficult to prevent
anyone from using, regardless of whether they pay for
its use.
• For this reason private sector is unwilling to produce
and supply these goods – cannot deliver an efficient
quantity of these goods
EXAMPLES?
What are the two
characteristics of public goods?
• Non-rivalry (non-diminishability)– Consumption of the
good by one person does not decrease the consumption
of the good by another person
• Non-excludability – people are not excluded from
benefiting from the good or service – attracting ? – who
benefit without contributing towards their costs
Merit Goods
• Markets sometimes produce an inadequate
quantity of an item e.g. healthcare and art
• The problem is that if they are provided solely by the
private sector then they tend to be underconsumed so, again, the government has to step in
to correct the market failure
• Merit goods are provided by the government either
directly – operating most hospitals or indirectly –
through providing financial support for arts
• The best two examples are healthcare and
education. Both of these goods can be provided
privately and publicly
• Merit goods are public goods which benefit the
community, not just individuals. Often it is a public
good provided on merit meaning the government
(usually) provides for the needy in the community,
e.g.: discounts on medicine for pensioners ($5.80
max price in 2012),
housing for the needy,
free education for all,
free healthcare for all etc.
• The concept of a merit good was introduced in
economics by Richard Musgrave (1957, 1959) and is
a commodity which an individual or society should
have on the basis of some concept of need, rather
than ability and willingness to pay
• Merit goods are things that are good for you.
• There are also demerit goods and these are goods
that are harmful to individuals and communities
• The government imposes restrictions on the
production and sale of these goods
Research Task
What restrictions has the government imposed on the
production and sale of demerit goods?
In groups of two or three search 1 policy,
advertisement or campaign which the government
has come up with in an attempt to stop or limit the
production and sale of demerit goods
My examples
• Australia’s plain
packaging legislation is
crucial both because it
will help prevent
children from starting to
smoke and encourage
adults to quit, and
because the domino
theory is nowhere more
evident than in
tobacco control
http://youtu.be/gUsB8AQtLOE
• Governments sometimes provide goods by operating as
a monopoly
• A natural monopoly – is a market structure in which
goods can only be efficiently provided by one supplier
• It occurs where it would be inefficient for competition to
operate. If the government did not maintain ownership
of these monopolies, then private owners would have
the exclusive control leaving consumers no choice but
to pay whatever price for their good or service.
• The government tries to set a fair price that ensures that
consumers pay for cost of providing the good or service
but are not exploited by extreme prices
Key features
1. No close substitutes
The good has no close substitutes – no competition
e.g. Water board – no substitute for showering or
washing cars – only other option is staying dirty!!
2. Barriers to entry
Legal or natural constraints that protect a firm from
potential competitors
E.g. of legal constraints – law, patent or licence
restricting competition by preventing entry
E.g. of natural constraints – firm can supply an entire
market at a lower price than one or two firms can
Market failure in the abuse of
market power
• It is difficult for small firms to survive in the market
given the costs of production, distribution,
marketing etc. possibly creating a market structure
where there is imperfect competition (oligopoly,
monopoly, monopolistically competitive)
• Businesses in highly concentrated industries have
considerable market power and abuse it in these
ways:
 Monopolisation
 Price discrimination
 Exclusive dealing
 Collusion and market sharing
• Monopolisation – a firm which uses its powerful
market position to eliminate existing competition or
stop new firms from entering the market
o E.g.
• Price discrimination – charging a higher price to
some customers than to others for an identical
product
o E.g.
Also occurs when an individual customer is
charged a higher price on a small purchase than
on a large one
• Exclusive dealing – When a business sets
conditions for supply excluding other
retailers from dealing with competitors
• Collusion and market sharing – occurs when
two or more producers get together and
agree:
o
o
o
o
to restrict output
on a price
on market sharing
on levels of output
in order to raise prices and profits
It is illegal in Australia
Cartel – group of firms entered into a
collusive agreement
What is another cause of market failure
which is not a result of the operation
within individual markets?
Market Instability
• Market failure can occur across the economy
• The boom-bust behaviour of activity in the
economy in the business cycle can create
considerable economic problems
• In a free-market severe fluctuations in the economy
can lead to numerous problems:
o Boom –
o Recession –
• Governments intervene to sustain economic growth
through macroeconomic policies such as ? and
microeconomic policies such as?