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--1.6.1 FREE & PRIVATE GOODS---
--1.6.1 FREE & PRIVATE GOODS---
"Why do you think this guy has no customers?"
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"That's right! Everyone already has more than enough to satisfy their wants, and there is no way to stop them from consuming it. In other words, it isn't scarce relative to demand, even when offered at £0, and it is non-excludable." Hence, it's impossible to charge a market price."
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"In addition, as it isn't scarce, its consumption doesn't come at the expense of any alternative use, as there is more than enough left over for others when it is used; in other words, it has no opportunity costs and isn't rivalrous in consumption."
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"We know that economics is the study of how societies decide to allocate scarce resources with alternative uses, so what happens if a good isn't scarce relative to demand and has no opportunity cost?" "If everyone can have as much as they want, do any allocation decisions need to be made?" "Should economists even concern themselves with such goods?"
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"The answer is 'NO!' and these goods are known as 'FREE GOODS' and generally fall outside the central focus of economics because they do not create an economic problem."
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"For this reason, economists are primarily interested in 'PRIVATE GOODS' that are the complete opposite."
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--[TASK]--
"Read the text above and explain what Milton Friedman meant when he used the famous quote below."
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--1.6.2 PUBLIC GOODS--
--1.6.2 PUBLIC GOODS--
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"Ok, so we just determined that free goods are non-excludable, non-rivalrous, and not scarce relative to wants, whereas private goods are excludable, rivalrous, and scarce relative to wants, so now let's look at a good that is non-excludable, non-rivalrous, and scarce relative to wants."
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"PUBLIC GOODS are defined as goods or services that have the following THREE CHARACTERISTICS:
(i) NON-EXCLUDABLE
(ii) NON-RIVALROUS.
(iii) SCARCE.
is scarce relative to their wants
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"But why is it a market failure, Mr. B?"
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"Look, every time I set group projects where each group makes a sharable online resource (e.g, revision website, past-paper kahoots etc...), it has 'ALWAYS' ended with only one or two complete, usable resources?" "Can you think why this is?"
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"Group project: Revision website"
"Look at this image and tell me if it feels familiar. Were you the student suffering from non-contributing group members, or were you one of these 'free riders'"? "Why would she put in maximum effort if she knew she had to share the grade?"
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"Well, given the vote, many students would simply prefer to work alone, as all their extra contribution will not be rewarded because they can't 'exclude' (non-excludable) these free riders from sharing in the grade that they worked for; hence, you would expect opportunities for this type of group project to be underprovided, despite it being a favorite activity for most."
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"...furthermore, the fact that the online revision resource can be used by everyone for free without reducing access for others (non-rivalrous) would surely incentivize other groups to think, "We can just access the other groups; it's not like it will run out and they don't lose anything, so we don't need to bother doing a good job; we will just use their one!"
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"Now imagine there is a good or service that, once you purchase it at your own cost, you can't 'exclude' others from benefiting from it, and it can be endlessly consumed by others, would you buy it in the first place?"
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"Unlikely, right?" "Which basically means no producer will make it. So despite the fact that people want it, no market will exist to provide it; hence, the market has failed, and DIRECT GOVERNMENT PROVISION is required."
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--[TASK]--
"Using the past paper question and MS below, choose your own example of a public good and complete a model answer."
--1.6.3 MERIT GOODS--
--1.6.3 MERIT GOODS--
"MERIT GOODS are goods or services that society should value as having 'merit'; that is, they are deemed worthwhile or beneficial to consume. However, the free market generally underprovides them because...
1) "...individual consumers' demand fails to reflect their full private benefits due to imperfect information and/or..."
2) "...because their consumption generates external benefits for third parties that the individual consumer completely ignores. Consequently, governments may intervene to encourage greater consumption."
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"Let's break this down step-by-step using EDUCATION as our prime example."
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"MARKET FOR LANGUAGE LEARNING IN THE UK"
"Have a look at this infographic". "Why do you think this trend is happening in the UK?"
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"Could it be that English-speaking students don't see the long-term (full) benefits of studying a foreign language compared to the immediate benefits gained from mastering math and English in terms of A-level choices or university entry requirements?"
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"As a former IGCSE Italian D-grader myself 🫣, I can admit that this is true; I was only thinking short-term, assumed knowing English would be enough, and 'LACKED THE INFORMATION' regarding how useful other languages would be in my future. I really wish younger me knew what older me knows now😡."
"See how much a second language can have your salary!"
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"So clearly the more awareness of the 'full benefits,' the better the ability of the individual to judge their level of consumption (demand) and in the case of foreign languages, the consumer demand should in fact be much greater than it actually is.", "Just look at the info below on China's spending on English lessons." "Do they know something we don't?"
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"If we go a step further and look at education in general, there is a body of research that suggests that it can even make you live longer." 👍
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--[TASK]--
"So you should have realised that there are now two demand curves, one that reflects the perceived private benefits of an imperfectly informed consumer (MPB1) and one that reflects the true private benefits of a perfectly informed consumer (MPB2). Create a diagram to show this situation."
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"...there's even more benefits to add!"
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"Look at the image below. Do you think he should have to pay the full price, or should he receive some compensation from others for the external benefits he creates for them?"
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--"At the doctor's, paying for a vaccination."--
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"This scenario, of course, would never arise, as when the patient decides what dosage to get, he naturally only compares his private costs against his private future benefits (his own future health, which, as we know, is likely to be based on his 'imperfect' knowledge anyway) and, of course, does not even consider paying for any external benefits created for society. Hence, his demand curve is not only imperfect but also not inclusive of these external benefits, creating an even greater level of underprovision from the societal point of view."
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"In other words, goods like vaccinations also create 'direct' external benefits to members of society not involved in the production and consumption of the good (called 'third parties'). These benefits are called POSITIVE EXTERNALITIES and if the market demand is supposed to reflect society's total demand for a good, then these external benefits should also be included; however, the free market system does not have any mechanism to 'internalise' these benefits."
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--[TASK]--
"In the case of vaccinations, the positive externalities are pretty obvious, but what about education? Can you think of any direct benefits to society that result from you receiving education?"
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"More education => Lower crime rates."
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"More education => Higher productivity => Higher GDP."
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"More education => More innovation."
"...in conclusion a highly skilled population can attract more investment and spur innovation, leading to higher productivity for everyone, even the less educated. This is often referred to as a "human capital externality" or a "knowledge spillover."
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--[TASK]--
"Add a further demand curve to your previous diagram labelled 'MPB + external benefits'."
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"So if a good's full benefits are underestimated by its consumer and it creates positive externalities, it must be a merit good, right?"
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"Not necessarily, do you remember the terms 'should' and 'value' in the definition above?", "We encountered these words in a previous unit when we discussed 'normative statements'; as such, if a good is to be called a 'merit good,' society or the government must make a normative judgment that greater consumption is socially desirable and therefore worthy of encouragement or intervention.
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--[TASK]--
"Choose one of these items and explain the 'Case FOR' and the 'Case AGAINST' it being considered a MERIT good."
Deodorant?
Sunscreen
Ozempic
Condoms?
Bread?
--1.6.4 DEMERIT GOODS--
--1.6.4 DEMERIT GOODS--
"DEMERIT GOODS are goods or services that society believes have 'demerit'; that is, they are deemed undesirable or harmful to consume. However, the free market generally overprovides (or overconsumes) them because:
1) "...individual consumers' demand fails to reflect their full private costs due to imperfect information and/or..."
2) "...their consumption generates external costs for third parties that the individual consumer completely ignores."
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Consequently, governments may intervene to discourage consumption.
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"Let's break this down step-by-step using SUGARY DRINKS as our prime example."
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"MARKET FOR SUGARY DRINKS IN THE UK"
"Have a look at this infographic". "Why do you think this trend is happening in the UK?"
--[TASK]--
"Using the definition and graphing of merit goods, create the demerit alternatives to explain why sugary drinks are considered demerit goods that require government intervention."
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