2. Market Failure
Merit Goods and Public Goods
◦Merit Goods – Could be provided by the market but
consumers may not be able to afford or feel the need to
purchase – market would not provide them in the
quantities society needs
3. Market Failure
Education – nurseries,
schools, colleges, universities
– could all be provided by the
market but would everyone
be able to afford them?
Schools: Would you pay if the state
did not provide them?
4. Classifying goods
The price system normally enables markets to provide the efficient quantity of a good because
prices send the right signals to both consumers and producers.
However, there are some goods and services in the economy that do not have prices, which
means that these goods will not usually be produced by markets.
To examine these types of goods we need a way to separate the goods that have prices and those
that do not.
A useful way to classify the different goods in the economy is to use two criteria:.
Whether a good is rival in consumption - does the consumption by one person reduce the
supply available to other users?
Whether a good is excludable - is it possible to exclude a non-payer from consuming the good
5. THE DIFFERENT KINDS OF GOODS
Characteristics of Goods
Useful to group various types of goods according to two
Is the good excludable?
Can people be prevented from using the good?
Excludability is the characteristic of a good whereby a
person can be prevented from using it
6. THE DIFFERENT KINDS OF GOODS
Characteristics of Goods
Is the good rival?
Does one person’s use of the good diminish another person’s ability to use
Rivalry is the property of a good whereby a person can be prevented from
Consumption by one individual does not affect supply available for other
Non-rivalry implies that marginal social cost of supply the good to an
additional individual is zero
7. THE DIFFERENT KINDS OF GOODS
Characteristics of Goods
Goods differ by the amount of these two characteristics and can be
grouped accordingly into four categories
1. Private goods
2. Public goods
3. Common property goods
4. Club goods
8. Private Goods
A pure private good is a good or service that generates no externalities, and the producer or
consumer of which enjoys all allocated benefits and bears all associated cost.
Private goods are most goods purchased by households and are usually characterised as;
A good is rival in consumption if one person’s consumption decreases the consumption of
e.g. all goods bought from a shop are examples. If a car is purchased from a showroom it
reduces the stock of cars available to the public by one. Other examples include food and
Excludability means that those consumers who are willing and able to purchase a product
gain exclusive rights of ownership and the benefits that can be derived from that ownership
such as property rights.
A pure private good is rival and excludable.
9. A public good is a good or service that can be consumed simultaneously by everyone
and from which no one can be excluded
e.g. The signals put out by global positioning satellites can be used by anyone who
has a GPS receiver. These signals are a public good.
◦ Public goods are normally non-rival if the consumption by one person does not
decrease the consumption by another person such as the use of footpaths,
national parks, firework displays, free to air television and street lighting
◦ A public good is non-excludable if it is impossible, or extremely costly, to prevent
someone from benefiting from it such as national defence, police protection,
public water supplies, lighthouse protection for ships.
A pure public good is nonrival and nonexcludable.
10. Public goods and market failure
Pure public goods are not normally provided by the private sector because they would be unable to supply
them for a profit.
It is up to the government to decide what output of public goods is appropriate for society.
To do this, it must estimate the social benefits from making public goods available.
The Free Rider Problem
A free rider is a person who consumes a good without paying for it
Because public goods are non-excludable it is difficult to charge people for benefitting from a good or service
once it is provided
Public goods create a free-rider problem because the quantity of the good that a person is able to consume is
not influenced by the amount the person pays for the good.
So no one has an incentive to pay for a public good.
The free rider problem leads to under-provision of a good and thus causes market failure
11. CLUB GOODS
Sometimes possible to divide population into two or more consumption groups or clubs
Each club consumes its own public good
Club goods are goods that are nonrival but excludable
Cable TV requires the user to pay, therefore excluding some, but everyone that pays has access to as
many channels as they wish (non-rival)
Sometimes provided by government, sometimes by private goods
Swimming pools, golf courses, movie houses, Pay-per-view cable television
Often are natural monopolies (cable TV), Australia Post, Telstra, utilities
Government may intervene by imposing a price ceiling
12. COMMON PROPERTY GOODS
Common property goods are goods that are rival but not
When common property goods are consumed it imposes a
negative externality on other consumers
Examples: oceans, atmosphere, rivers
Fish in the ocean are rivalrous, because when person catches the
fish, there are fewer fish for the next person to catch.
o Fish in the ocean are not excludable, because it is difficult to stop
people from taking fish out of the ocean
Cannot be priced, they are free.
13. Terminology, and types of goods
fish stocks, timber,