Revision Notes

Revision notes :

1) Public goods

There are two main criteria for a good or a service being a public good :

1. Non rivalrous consumption: This means that when I consume a good, it doesn’t reduce the amount available for others.
   - E.g. benefiting from a street light doesn’t reduce light for others, but eating an apple would.
2. Non- excludability: This occurs when it is impossible to prevent others from consuming or benefiting from the provision of a good

The problem with public goods is that they have a free – rider problem. This is when individuals consume without paying, attempting to benefit from the purchases by others.

2) Merit good

Merit good - any good that has positive externalities associated with it.

A merit good has 2 characteristics:

• People do not realise the true benefit. For example, people underestimate the benefit of education or vaccinations.
• Usually these goods have positive externalities.

Therefore in a free market there will be under consumption of merit goods.

Examples of Merit Goods:

§ Education

§ Training

§ Health – care services

§ Museums

The supply and demand diagram below relates to the market for a merit good.

The demand curve for the merit good shifts from D1 to D2, raising the market price from P1 to P2.

3) Demerit good

A demerit good is one which is overprovided by the price mechanism and tends to yield more cost to individuals than they relies.

Examples of Demerit Goods:

• Tobacco
• Alcohol
• Drugs