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Tutor2u - Market Failure – De-Merit Goods

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De-merit goods deliver a lower benefit to the consumer than he or she realises at the time of consumption and, given the combination of information failure and negative externalities from consumption, market failures are highly likely to exist and persist in the absence of government intervention. The AQA exam board likes students to draw a diagram where the marginal social benefit of consumption lies below the marginal private benefit. In this edition of the revision guide you will see a diagram where marginal social cost lies above marginal private cost. AQA examiners’ reports confirm that this approach (taught by many) is acceptable for questions on de-merit goods. So sleep easy!

Published in: Economy & Finance
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Tutor2u - Market Failure – De-Merit Goods

  1. 1. Market Failure – De-Merit Goods
  2. 2. Market Failure De-Merit Goods
  3. 3. De-Merit Goods • De-merit goods are thought to be ‘bad’ for you • Consumption can lead to negative externalities • The social cost of consumption is higher than the private cost • Consumers may be unaware of the negative externalities that these goods create – they have imperfect information about long-term damage to their own health. • Government may decide to intervene in the market for de-merit goods and impose taxes on producers or consumers. • Many economists argue that taxation is an ineffective and inequitable way of curbing the consumption of drugs and gambling particularly for those affected by addiction. • Banning or limiting consumption through regulation may reduce demand, but risks creating secondary (illegal) markets Social cost = private cost + external cost. The market may fail to price the externalities
  4. 4. Examples of De-Merit Goods High Caffeine Energy Drinks High-fat, high- sugar & high-salt foods Violent films and games Hands-free mobile phones in vehicles Alcohol fraud and binge drinking Tobacco products Key point: Arguments about what is a de-merit good involves making value judgements
  5. 5. Obesity and Externalities • Obesity is a huge global economic and social problem • More than 2.1 billion people – nearly 30% of the global population – are estimated to be overweight or obese today • The private costs of obesity are higher for lower income households • According to research from McKinsey, the global economic impact from obesity is roughly $2.0 trillion, or 2.8% of global GDP • The cost of obesity on national health systems is estimated to be 2% and 7% of all healthcare spending in developed economies • This figure is likely to be much higher when the external costs arising from Type 2 diabetes is included • No country has managed to reduce measured rates of obesity between the years 2000-2013 To help your evaluation: Think about the stakeholders involved in the food and drink industry who might be affected by a change in government policy such as a high fat tax.
  6. 6. Obesity – Evaluating the Effectiveness of Interventions Tax on high-fat and high-sugar content foods End to supermarket price promotions of certain foods e.g. two for one offers Government might provide free compulsory school meals and take steps to improve meal quality Government provides personal subsidies (e.g., food stamps for low- income individuals for sole use with health foods) Price incentives to change demand Grocery retailers asked to allocate a greater share of space to healthier products and categories School / office canteens organised differently to make healthier foods more prominent Schools voluntarily ban vending machines and snack shops Prescription of weight-loss drugs / treatments, perhaps conditional on active lifestyle changes Behaviour nudges to influence choices
  7. 7. E-Cigarettes: Are they a Merit or a De-Merit Good? Private Benefits of E-Cigarette Consumption External Benefits of E-Cigarette Consumption Utility of a nicotine hit E-cigarettes help smokers quit Less social isolation Reduced health costs to society Private Costs of E-Cigarette Consumption External Costs of E-Cigarette Consumption Cost of starter e-cig packs Vapor from e-cigs is dangerous Cost of liquid-nicotine cartridges Gateway for young people to smoke 16% of the population use e-cigarettes. However, only 0.14% of the population use e- cigarettes having never smoked before. The majority of users of e-cigarettes are current smokers or people who have given up smoking. (Source of Data: ONS, October 2014).
  8. 8. Welfare Case for a Complete Ban on a Product The case for a complete ban on de-merit goods such as class A narcotics could be justified on the ground that the social marginal cost of consumption is always higher than the social marginal benefit. In the diagram there is no output where the social benefit equals the social cost and welfare would be best protected by trying to enforce a total ban on the product. Costs, Benefits £s Output / quantity MPC P1 Q1 MPB = MSB P2 Q2 MSC External Cost What are the main problems in imposing a ban?
  9. 9. Get help from fellow students, teachers and tutor2u on Twitter: @tutor2u_econ
  10. 10. Tutor2u Keep up-to-date with economics, resources, quizzes and worksheets for your economics course.

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