4.3.1 Market Failure in Society
The consequences of the underpraising and under consumption of merit and other goods and services
Occurs when the free market fails to allocate resources efficiently
Economic and social welfare is not maximised
Overconsumption of demerit goods
Overprovision of demerit goods and under provision of merit goods
Education would be underprovided in a free market as the long term befits are not accounted
for in society
Not all products that create externalities are merit or demerit goods
Factor immobility (occupational & geographical)
The geographical immobility of labour
Obstacles that prevent labour from moving between different areas
Hard to find labour due to social & family ties
The occupational immobility refers to obstacles preventing labour changing their use
Labour might find it difficult to change occupation
Due to the lack of training and skills
The flexibility of the labour market is how willing and able labour can change to market
conditions
Important for labour to adjust to market demand
Imperfect and asymmetric information
The under provision of public goods
Public goods are non-excludable a non-rival
They are underprovided in a free market due to the free rider problem
Public goods that benefit society are missing in free markets
o Streetlights
Public goods are non-excludable so by consuming goods someone else is being prevented from
consuming goods
They are also non rival, so the benefit others get does not have a cost to others.
Non excludable nature of public goods increases the free rider problem
People do not pay for the good however still receive benefits from it the same as people who
pay for it
This is why public goods are underprovided by private sector
They do not make any profit of providing
They are underprovided as it is difficult to measure the value
Consumers undervalue the benefit so want to pay less
Producers over value the benefit so want to charge more
The consequences of the underpraising and under consumption of merit and other goods and services
Occurs when the free market fails to allocate resources efficiently
Economic and social welfare is not maximised
Overconsumption of demerit goods
Overprovision of demerit goods and under provision of merit goods
Education would be underprovided in a free market as the long term befits are not accounted
for in society
Not all products that create externalities are merit or demerit goods
Factor immobility (occupational & geographical)
The geographical immobility of labour
Obstacles that prevent labour from moving between different areas
Hard to find labour due to social & family ties
The occupational immobility refers to obstacles preventing labour changing their use
Labour might find it difficult to change occupation
Due to the lack of training and skills
The flexibility of the labour market is how willing and able labour can change to market
conditions
Important for labour to adjust to market demand
Imperfect and asymmetric information
The under provision of public goods
Public goods are non-excludable a non-rival
They are underprovided in a free market due to the free rider problem
Public goods that benefit society are missing in free markets
o Streetlights
Public goods are non-excludable so by consuming goods someone else is being prevented from
consuming goods
They are also non rival, so the benefit others get does not have a cost to others.
Non excludable nature of public goods increases the free rider problem
People do not pay for the good however still receive benefits from it the same as people who
pay for it
This is why public goods are underprovided by private sector
They do not make any profit of providing
They are underprovided as it is difficult to measure the value
Consumers undervalue the benefit so want to pay less
Producers over value the benefit so want to charge more
