Other reasons for intervention
Introduced| English | Meaning |
|---|---|
| public good/ˈpʌblɪk ɡʊd/ | A good that is non-rival in consumption and non-excludable. |
| non-rival/nɒn ˈraɪvl/ | non-rival |
| non-excludable/nɒn eksˈkluːdəbl/ | non-excludable |
| free-rider/friː ˈraɪdə/ | Someone who receives the benefit of a shared good without contributing to its provision. |
| demerit goods/ˈdemərɪt ɡʊdz/ | demerit goods |
| merit goods/ˈmerɪt ɡʊdz/ | Goods whose benefits consumers may underestimate, resulting in consumption below a socially desirable level. |
| asymmetric information/ˌeɪsɪˈmetrɪk ˌɪnfəˈmeɪʃn/ | A situation in which parties to a transaction possess different relevant information. |
| monopoly power/məˈnɒpəli ˈpaʊə/ | A firm's ability to influence its selling price rather than accept a price set by market competition. |
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:
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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.
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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:
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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.
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E.g. a used-car seller knows the car's faults better than the buyer.
Match each market failure to an example.
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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
Write from a total benefit of 200
- 100 residents each value a park at 2.
- The park costs 150, but each resident hopes someone else will pay.
What is the total benefit, and why might the park not be built?
Total benefit exceeds cost, but free riders block a private sale.
Why might the park not be built privately?
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Non-excludability causes free riding.