Tuition Singapore H2 Economics – Distinguish between public goods and merit goods.

Model Answer

Public goods are goods that are non-rivalrous in consumption and non excludable as well whilst merit goods are goods deemed socially desirable for individuals by one’s government. Both public and merit goods experience market failure whereby society is not consuming an producing at the socially optimum output. However, public goods experience complete market failure whilst merit goods only experience partial market failure.

Firstly, public goods, such as street lighting are non-rivalrous whilst merit goods are rivalrous, such as sports facilities’ usage. Public goods, being non-rivalrous refers to the fact that a person’s consumption of one unit og good does not lead to one unit of good lees being available to another consumer. This can be seen where one person’s usage of street lighting for reading a book will not make it any less dim for a second person. Merit goods, however, are excludable. This leads to a situation where one’s usage of sports facilities such as a usage of a sport hall for badminton will deprive another user of using the same sports hall as there is limited capacity.

Additionally, public goods are non-excludable whilst merit goods are excludable. Utilising the same examples, this refers to the fact that non-payers cannot be excluded from consuming a public good as there is no feasible way to charge consumers for the good. Street lighting, for example, cannot be charged as they are on public roads which anyone can use. This leads to the use of a pricing or ticketing system to be impractical. Merit goods, however. are excludable. This is said with reference to the ability to collect entry fees per person when entering swimming pools and other facilities as these facilities are enclosed and have an ability to allow consumers to be charged on entry.

The extent of market failures for public and merit goods also differ.

For public goods such as street lighting, due to its non-rivalrous nature, this leads to the marginal cost (MC) of production of an additional unit of street lighting for consumers to = 0. As socially optimum or allocative efficient firms require P = MC, where MC = 0, P = 0. However, firms will not want to produce where they must charge $0 for a good as they are in pursuit of self interest and of profit motive. As such, there will be no effective supply of street lighting. Additionally, as street lighting as an example is also non-excludable, his leads to the free-ridership problem. Where non­paying customers cannot be excluded from paying consumers, consumers will choose not to pay and wait for someone else to pay. This leads to an ineffective demand and a lack of price signals. Public goods thereby experience complete market failure as there is a missing market where demand and supply are non-existent.

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