Market Failure

Merit and demerit goods for rail transport case study for 2013

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  • WHAT MARKET FAILURE MEANS
    • LESS THAN OPTIMUM ALLOCATION OF RESOURCES
      • LAND, LABOUR AND CAPITAL
      • RESOURCES ARE DISTRIBUTED BETWEEN THE VARIOUS INDUSTRIES IN THE PROPORTIONS NECESSARY TO ACHIEVE THE MAXIMUM BENEFIT
        • OPTIMAL ALLOCATION OF RECOURCES
      • GW- E.G. WE NEED JUST THE RIGHT AMOUNT OF RAIL TRANSPORT RELATIVE TO THE AMOUNT OF OTHER TRANSPORT MODES
    • PUBLIC GOODS
      • FREE MARKET WOULD NOT PRODUCE THESE
      • E.G. DEFENCE AND LIGHTHOUSES
      • THE BENEFIT OF THESE GOODS IS AVAILABLE TO EVERYONE SO THERE IS NO PRIVATE BENEFIT
      • PUBLIC GOODS ARE A CLEAR EXAMPLE OF LESS THAN OPTIMAL ALLOCATION OF RESOUCES
      • E.G.  THE FREE MARKET WILL ALLOCATE NO RESOURCES  TO THE ARMY EVEN THOUGH SOCIETY AS A WHOLE MAY GAIN A BIG BENEFIT FROM BEING DEFENDED
      • GW- RAIL NETWORK IS NOT A PUBLIC GOOD SINCE ACCESS CAN BE CONTROLLED BY TICKETING BARRIERS
      • GW-  SUBSITUTE FOR RAILS IS ROAD TRANSPORT (PUBLIC GOOD) WHICH IS OVER UTILISED AS DRIVERS ARE NOT PAYING THE FULL EXTERNAL COSTS OF   CONGESTION THEY CREATE
        • RAIL TRANSPORT IS THEREFORE UNDER UTILISED
    • MERIT GOODS
      • GW- RAIL TRANSPORT CAN BE SEEN AS A MERIT GOOD
        • REDUCE CONGESTION ON THE ROADS
      • PRIVATE BENEFIT TO THE BUYER
        • ENTREPRENEURS    WILL PRODUCE IT
      • EXTERNAL BENEFIT WHICH NEITHER BUYER OR SELLER TAKE INTO ACCOUNT
      • FREE MARKETS ALLOCATION OF RESOURCES TO INDUSTRIES    PRODUCING    MERIT    GOODS IS TOO SMALL
      • E.G. HEALTH AND EDUCATION
        • SWINE FLU JAB - YOU WON'T GET IT (PRIVATE BENEFIT) BUT REDUCES THE RISK OF PASSING IT ON TO SOMEONE ELSE (EXTERNAL BENEFIT)
          • EXTERNAL BENEFIT WHICH NEITHER BUYER OR SELLER TAKE INTO ACCOUNT
      • GW- IF PRIVATE CARS ARE DEMERIT GOODS BECAUSE OF THE EXTERNAL COSTS THEY GENERATE    THEN THE    APPROPRIATE RESPONSE IS TO TAX THEIR USE
        • THIS WILL  CAUSE A SWITCH TO RAIL TRANSPORT WITHOUT THE NEED FOR AN ADDITIONAL SUBSIDY FOR THE RAIL NETWORK
      • RAIL TRANSPORT DOES NOT PRODUCE AN EXTERNAL BENEFIT IN ITS OWN RIGHT
    • DEMERIT GOODS
      • FAILURE OF THE FREE MARKET TO PRODUCE AN OPTIMAL ALLOCATION OF RESOURCES
      • MERIT GOODS PRODUCE AN EXTERNAL AND PRIVATE BENEFIT, DEMERIT GOODS PRODUCE A PRIVATE BENEFIT BUT EXTERNAL COST
        • NEITHER BUYER OR SELLER TAKE INTO CONSIDERATION THE EXTERNAL COSTS
      • E.G. DRUGS AND POLLUTION
        • RESTRICT CONSUMPTION WITH TAX
          • REDUCE THE OUTPUT OF THE INDUSTRY TO ITS   ALLOCATIVELY EFFICIENT LEVEL
      • GW- RAIL TRANSPORT IS A MERIT GOOD BUT THERE ARE EXTERNAL COSTS SUCH AS CO2 EMISSIONS (MORE FROM DIESEL    POWERED THAN ELECTRIC) AND DETERIORATION IN PROPERTY VALUES OF   NEIGHBOURHOODS   AROUND LONDON'S MAIN RAIL WAY STATIONS
    • EQUITY AND EQUALITY

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