<3.1 REASONS FOR GOV'T INTERVENTION>

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"We defined public goods in unit 1.6 and explained that they are goods that the market will likely never provide (a 'market failure'); hence, the government may intervene on occasions."

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--RECAP TASK--

"Using the matrix below, decide which quadrant each of the 10 goods belongs in, then copy it and explain at least 4 of your choices (one per quadrant)."

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"Surely the fact that the government intervenes implies that they view them as 'having merit', so does that mean ALL PUBLIC GOODS ARE MERIT GOODS?"

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"Nope, despite both goods 'having merit', public goods, by definition, won't be provided at all by the private sector, whereas merit goods will be underprovided."

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"We defined both MERIT and DEMERIT goods back in unit 1.6 and explained that they are goods that the market will either underprovide or overprovide relative to the 'socially optimal level'; hence, the government will intervene to correct this."

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"There are 4 scenarios that can arise."

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--UNDER CONSUMPTION OF MERIT GOODS--

"In terms of MERIT GOODS, we learned that for the CONSUMPTION of certain goods like education, the market demand curve (MPB) does not reflect the total benefit to society (MSB) as it excludes the individual's full private benefits due to a lack of information, as well as any external benefits created for society; hence, it only reflects an 'imperfectly informed private benefit (MPB)' that is too far to the LEFT, 

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--UNDER PRODUCTION OF MERIT GOODS--

"...similarly, we learned that for the PRODUCTION of certain goods like R&D, the market supply curve reflects the 'perfectly informed private benefits + external benefits (MSC'; hence, it only reflects an 'imperfectly informed private benefit (MPC)' that is too far to the LEFT." 

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--OVER CONSUMPTION OF DEMERIT GOODS--

"In terms of DEMERIT GOODS, we learned that for the CONSUMPTION of certain goods like VAPES, the market demand curve (MPB) does not reflect the total costs to society (MSB) as it excludes the individual's full private costs due to a lack of information, as well as any external costs created for society; hence, it only reflects an 'imperfectly informed private benefit (MPB)' that is too far to the RIGHT, 

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--OVER PRODUCTION OF DEMERIT GOODS--

""...similarly, we learned that for the PRODUCTION of certain goods like ELECTRICITY GENERATED USING COAL FIRED POWER STATIONS, the market supply curve (MPC) does not reflect the total costs to society (MSC), as it excludes the firm's full private costs due to a lack of information, as well as any external costs created for society; hence, it only reflects an 'imperfectly informed private benefit (MPB)' that is too far to the RIGHT, 

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--TASK--

"Create FOUR seperate diagrams to illustrate these scenarios using the labels below."

 'Free market equilibrium quantity' (Qfm),

'Socially optimal level of output' (Qso),

'The imperfectly informed demand curve' (MPB),

'The imperfectly informed supply curve' (MPC),

'The perfectly informed + externalities demand curve' (MSB),

'The perfectly informed + externalities supply curve' (MSC)

'Area of lost potential benefit' (DWL)

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"This was touched upon in unit 2.5 CONSUMER & PRODUCER SURPLUS, when we looked at the impact on CS and PS of fixing prices above and below the equilibrium price." 

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"Now we will look at why this type of intervention might be taken in the first place."

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"That's right, a ‘PRICE FLOOR’ is a form of government intervention primarily SET TO PROTECT PRODUCERS, as the government may decide that THE MARKET PRICE IS TOO LOW for them TO EARN A SUSTAINABLE INCOME, especially SMALL, VULNERABLE and VITAL PRODUCERS who would STRUGGLE TO SURVIVE AT VERY LOW PRICES."

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"As such, price floors are USUALLY PLACED ON GOODS, such as agricultural products (milk, wheat, and sugar), certain labour markets (minimum wage), and sometimes raw materials, which can all be described as “ESSENTIAL INCOME SOURCES” for PRODUCERS WHO CAN’T SURVIVE IF PRICES FALL TOO LOW."

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