Textbook Theory Unit 4b

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Text
book
Theor
y
Sections of topic
Need to know terms/phrases
4.3.1b: Do Markets Always Work?
What
Mar
ket
Fai
lur
e Means
Mar
ket
Fai
lur
e r
efer
s t
o si
t
u at
ions
w her
e f
ree
mar
ket
f
orces
have
led
to
an
inef
fi
ci
ent
al
locat
ion
of
r
esour
ces
.
Reasons
for
Ma r
ket Fai
lur
e:
Publi
c and meri
t
go ods
.
Wh en
the e xt
ernali
t i
es a ssoci
ated
w i
th
product
ion
or
consumpti
on
are
high
.
I
mp erf
ect
c ompeti
tion (e .
g.
mo nopoli
es busi
nesses
have
less
inc ent
ive
to
c ut
cost
s and
avoi
d wast
ing
resou rces cus t
o me r
w i
ll
have
to
pay more
than
necessar
y).
I
ne qual
it
y.
Publ
ic
G oods
Cann ot
be pr
ovid ed
for
eff
ici
entl
y by
the pr
ivat
e se ctor.
Once
provi
de d,
they are
avail
able
to
all
.
No o ne can be
e xcluded
from enj
oying
th eir
benefits
.
Wh en one
p er
so n consume s
them,
they wil
l
not
be
us ed up and
unavai
labl
e t
o ot
her
s.
Busin esses
h ave
no i
ncenti
ve to
provi
de for
t
he m.
There i
s no
w ay to
charge f
or
them once
they
are in p l
a ce ,
exce pt
t
hrough
tax
.
E.g.
l amp post
s.
Subj ect
to
`f
ree rider
'
problem (no
one ha s an
incen ti
v e t
o pay f
o r
them).
Govern ment
c an
over
come
thi
s
by
raisi
ng taxati
on or
legal
enf
orceme nt
to
p a y
for t
h em,
e .g.
TV l
i
cences.
Prov idi
ng publi
c goo ds
deals
w i
th
one as pect
of ma rk et
fai
lur
e.
Demeri
t
G oods
E.
g.
To bacco:
i
f
the
costs
of
thei
r
smoki
ng
rel
ated
healt
hcare
are
great
er
than t
he tobacco
t
axes,
t
here
w i
ll
be
a cost
t
o soci
ety
.
E.
g.
Il
le gal
drugs:
hi
gher
cri
me
rat
es,
vi
olence
and heal
thcar
e ar
e t
he soci
al
cost
s.
Meri
t
G oods
See n
to
be soci
all
y desi
rable but
they
are l
ikel
y t
o be underproduced i
f
lef
t
to
the
ma rket to
pr
ovide
.
Pot
e nti
al
consume rs
ma y
be unable
or
un wi
ll
ing
to pay
the pr
ices
being
charged by
fi
rms .
E.
g.
educati
on,
h eal
thcar
e.
Can
be
provi
ded on t
he bas i
s of
me r
it
,
i.
e.
cap aci
ty
to
be nef
it
rat
her
than
abil
it
y t
o pay
.
Mer i
t
goods are
provi
ded
by
the st
ate
b ecause
the market
excludes
those
mo st
i
n need
.
I
t
is i
n t
he
int
erest
of
soci
ety
as a whole,
t
o ensure
a
healt
h y
and educat
ed popul
a t
i
o n
.
Mer i
t
goods bri
ng subst
antial
social
benefi
ts:
educati
on l
it
erate,
numerat
e,
skil
led
work
force.
H ealt
hcare ensur
e
`
h ea l
thy'
workf
orce,
reduci
ng
sick
days
boosti
ng l
abour
product i
vity
.
Equi
t
y
I
nvolves
a f
a i
r
or
just
di
str
ibut
ion
o f
i
ncome
and wealt
h
.
Thi
s does not
necessar
il
y mean that
i
nco me
is
dist
ri
bu t
e d
eq ual
ly bet
w een
all.
Dif
fer
e nces
in
incomes i
ncreased
o ver
p ast
30
years
.
Dispar
it
y i
n i
ncome l
ess
in
U K
than US
.
Explanat
ions
for
inequal
it
y:
excepti
ona l
tal
ents,
mon opo l
y power
.
I
neq ual
it
y i
s an
aspect
of
ma rket
f
ail
ure because pove r
ty ent
ail
s social
cost
s.
Povert
y can be
addressed t
hrough i
ncome
redi
str
ibut
ion
(usi
n g
tax syst
em an d
mer
it
goods)
.

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