How Free Markets Fail: Merit & Demerit Goods

This clip explains why certain goods are over or underconsumed in a free market. It covers the idea of externalities and market failure

Category:

Education

Tags:

• Economics
• Externalities
• Information
• Failure

[BrynJonesOnline]

roiGiovanni: In theory perfect knowledge would mean all consumers would consume the "right" quantity in the free market (ie the social optimum where MSC=MSB )and so merit and demerit goods would cease to exist.....but in reality there is often information failure and so merit/demerit goods continue to be consumed in the "wrong" quantities in a free market

[Szczych11]

Sorry Bryn, I'm not sure I agree with the above point about info failure. From my understanding, a demerit good may still be over-consumed if consumers have perfect info as they should be considered selfish and to only concern themselves with the MPC & MPB of consumption. They will therefore chose a level of consumption where mPb = mPc so the market would still fail. I consider info failure to compound over-consumption as individuals may perceive their MPC to be lower than it is - e.g. alcohol.

[RioGiovanni]

so when won't there be market failure in merit goods? when we are perfectly informed?

[RioGiovanni]

@SHBBKBB it is. advertising. Private firms want to see an increase in demand for their products, although advertising only really provides "information" in merit goods. because advertising isn't the same as providing information. Advertising is biased and misleading.

[raintree710]

lol that's the ticket tell people what they should and should not use or buy

[selfrealizedexile]

@BrynJonesOnline

What do you think about Murray N. Rothbard and the Austrian School of economics?

[snneakyy]

@BrynJonesOnline and that is how the cookie crumbles :)

[BrynJonesOnline]

@rekram29 This is not an anti-market rant and in general, I agree with your comment. The point of this video is to show that some free markets fail and that when they do, then governments can intervene to (hopefully) correct the market failure. Of course, sometimes when governments intervene they just make things worseeg raising taxes on tobacco may just lead to more smuggling of cheap illegal cigarettes

[NoeticNick]

"information failure" implies that with the right information people would make better decisions for themselves. Example: if you tell people smoking causes cancer, they *should* decide to quit, but they don't. Personal change depends on more than just information. People need alternative ways to meet the need the demerit good met. E.g. increased self-esteem decreases consumption of alcohol, drugs, and junk food. :: People who feel better about themselves want to take better care of themselves.

[return135]

ok, i see this guys point that people dont always have the relevant information to make the "best" decision for themselves, but to jump to the conclusion: therefore government must tell us what is good and bad, is a ridiculous assertion. That assumes the government knows more about what is good for the individual then the individual himself knows. Its stupid. Its analogous to saying humans aren't perfect therefore we need imperfect humans to regulate imperfect humans. DUH LOGIC FAIL.