Other reasons for intervention
| English | Chinese | Pinyin |
|---|---|---|
| public good | 公共物品 | gōng gòng wù pǐn |
| non-rival | 非竞争性 | fēi jìng zhēng xìng |
| non-excludable | 非排他性 | fēi pái tā xìng |
| free-rider | 搭便车 | dā biàn chē |
| demerit goods | 有害品 | yǒu hài pǐn |
| merit goods | 有益品 | yǒu yì pǐn |
| asymmetric information | 信息不对称 | xìn xī bú duì chēng |
| monopoly power | 垄断势力 | lǒng duàn shì lì |
When markets need a referee
- Even working markets leave gaps: no one builds a lighthouse for profit, firms hide product flaws, and monopolies overcharge.
- Beyond externalities, several failures give governments a reason to step in.
Public goods 公共物品
- A public good is non-rival 非竞争性 (my use doesn't reduce yours) and non-excludable 非排他性 (you can't stop free-riders 搭便车) — e.g. street lighting, national defence.
- Markets under-provide them because of the free-rider problem, so governments supply them.
A coal power station: producing electricity can impose a negative externality such as pollution on others
Reasons for intervention
Governments step into markets when the free-market equilibrium isn't the best outcome for society.
A public good is under-provided by markets because of:
Non-excludability lets people free-ride, so private firms can't profit from supplying it.
People enjoying a public good without paying for it are called ______ riders.
The free-rider problem is why markets under-provide public goods.
Merit and demerit goods 有害品
- Merit goods 有益品 (healthcare, education) are under-consumed because people undervalue the benefit → governments encourage them.
- Demerit goods (tobacco, alcohol) are over-consumed because people underestimate the harm → governments discourage them.
An indirect tax shifts supply up; the burden splits between consumers and producers
A demerit good is one that is:
Demerit goods (tobacco, alcohol) are over-consumed; governments discourage them.
Information and market power
- Information failure / asymmetric information 信息不对称: one side knows more (a used-car seller vs buyer) → bad decisions.
- Monopoly power 垄断势力: a dominant firm restricts output and raises price above the competitive level.
Asymmetric information — "the market for lemons": buyers can't tell good used cars from bad, so they offer a low price, good cars leave the market, and quality collapses.
Asymmetric information means one party in a transaction knows more than the other.
E.g. a used-car seller knows the car's faults better than the buyer.
Match each market failure to an example.
Each is a distinct reason markets under- or over-allocate resources.
You've got it
- public goods (non-rival, non-excludable) are under-provided → free-rider problem
- merit goods under-consumed (encourage); demerit over-consumed (discourage)
- information failure and monopoly power are further reasons to intervene