Market failure Section 3 Q1(a)

Public goods are goods that are collectively consumed and give collective benefits to society such that the benefits are non-excludable. Merit and demerit goods are private goods, they have the characteristics of excludability and rivalry in comsumption. Public goods on the other hand have characteristics of non-excludability and non-rivalry in consumption.

One characteristic that make merit and demerit goods is the non-excludability in consumption. Merit and demerit goods which are private goods are excludable, while public goods are non-excludable. It means that once a public good is produced, it is available to all members of the community, irrespective of whether the individuals pay for it or not. Consumers who do not pay for the good cannot be excluded from consuming the good. This will result in the "free-rider" problem, in that, consumers will not want to pay to consume the good as they know that it is impossible for firms to exclude them in the consumption of the good. The result of this would mean that no private firms would want toundertake produciton of such goods as it is impossible to charge the consumers for the good on the basis of how much they use. The goods would thus be non-marketable. An example of a public good is national defence. Once defence is provided for the country, everyone in the country benefits from it, even the non-paying consumers such as students and tourists who do not pay taxes.

On the other hand, private goods such as healthcare is a merit good, is excludable in consumption such that non one can consume the good without paying for it. There will not be any "free-rider" problem and firms will want to undertake production of such goods as it is possible to charge the consumers for the good on the basis of how much they use. The goods would thus be marketable. Demerit goods such as cigarettes also have the characteristic of excludability in consumption and they are also marketable and do not have any "free-rider" problem.

Another main difference between private and public good is rivalry in consumption. For public goods such as street lights, they are non-rival in consumption such that the consumption of the good does not reduce the total supply available to others. For example, street lighting, upon consumption by one person, does not become less available to others. This is because there is no extra cost incurred by providing for another person's consumption (i.e. marginal cost is zero). Merit and demerit goods on the other hand are rival in consumption such that upon consumption by one person, would mean that it is less available to others. There is a cost incurred by the producer for the provision of an extra unit of the product (i.e. marginal cost is positive). The rivalry characteristic implies that the same unit of the good cannot be collectively consumed. Private good is thus divisible while public goods are non-divisible. One example of private goods is alcohol, which is a demerit good. They have characteristics of rivalry in consumption such that, when consumed by one person, it will reduce the amount of supply left available to others. Another example of private good is education, which is a merit good, in which upon consumption by one student, will result in another place in the school being taken up and less available to others.

However, although merit and demerit goods belong to the same category of private goods, they differ from each other in a few ways. Merit goods are goods and services that the government considers socially desirable while demerit goods are considered socially undesirable.

Merit goods give rise to positive externalities while demerit goods give rise to negative externalities. For example, a person who is educated will be able to contribute to the economy by working in the knowledge-based sector, thus, generating more employment for others who did not receive the same education as he did, this will in turn generate higher income for those who did not receive as much education. Demerit goods like cigarettes, on the other hand, give rise to negative externalities. A person who is in a smoking environment will take in passive smoke although he is not smoking. This will lead to the non-consumer having health problems after breathing in the polluted air and incurring medical costs in treatment.

In conclusion, although merit goods and demerit goods share some similarities as as private goods and have different characteristics to public goods, they also have differences between them.


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This essay is modified from Alson Mar's (0734) assignment. Take note of how the different characteristics were linked together (in paragraph 2 & 4) to give a more wholesome picture to the topic. The examples were also well-illustrated (not just a mere listing of examples). Take note of these 2 important points as they are missing from most of your assignments.