Market Failure refers to the inability of the free market to allocate resources in a way that maximizes social welfare. In cases where the market does not fail, welfare is maximized where MSB=MSC. Hence, society should allocate resources at this output to maximize welfare.
Public goods suffer from complete market failure while merit goods from partial failure.
This is because there is non-allocation/provision of public goods yet only under-allocation/provision of merit goods.
Public goods are also non-private goods, they are non-excludable and non-rivalry. Merit goods are private goods that are both rivalrous and excludable.
- That said, public goods are non excludable– it is not possible, or prohibitively expensive, to prevent someone from consuming the good. national defence, police force, streetlamps, roads. (this leads to the free-rider problem- where people consume the product even if they do not pay for it, people are not willing therefore to pay for the good) There is effectively no demand, and MSB=0
- non-rivalrous- consumption by one person does not prevent or does not reduce the qty available for consumption by the rest. for instance, streetlamps, ie, the additional cost of consumption is zero. MC=0.
because MC=0, and previously discussed, that social welfare is maximized at MSC=MSB, which in this case, MSC=MSB=0.
Because the price mechanism allocate where MSB=MSC, in which case is 0 for public goods. There is completely no allocation in this market because producers are not willing to sell the product at 0 and do not make profits. For instance, there is often a lack of provision of roads, streetlamps, in countries where governments have not intervened.
Merit goods are goods that are socially desirable and has huge amount of positive externalities. Failure arises because: refer to above qn