Market failure: public, merit and demerit goods Cambridge IGCSE Economics (9–1) revision
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In plain words
Markets usually do a good job of deciding what gets made. Sometimes they get it wrong: too much of a harmful thing, too little of a useful one, or none at all of something everybody needs. That is market failure.
It is the main reason governments step into markets.
6 things to know
- Market failure is when the price mechanism fails to allocate resources efficiently.
- A public good is non-excludable (nobody can be stopped from using it) and non-rival (one person's use does not leave less for others). Examples: street lighting, national defence, flood defences.
- Because people can benefit without paying (the free rider problem), private firms will not supply public goods, so the government must.
- A merit good is better for people than they realise, so too little is bought if left to the market: education, healthcare, vaccinations.
- A demerit good is worse for people than they realise, so too much is bought: cigarettes, alcohol.
- A monopoly can also cause market failure, by restricting supply to keep prices high.
Tips and tricks
- A public good is not just "something the government provides". Use the two tests: non-excludable and non-rival. Schools fail both, so education is a merit good.
- Merit goods are under-consumed. Demerit goods are over-consumed. Use those exact words.
It lands in your notebook with its questions as flashcards.
Market failure: public, merit and demerit goods: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which is a public good?
Nobody can be excluded from being defended, and one person's protection does not reduce another's.
What is the free rider problem?
With a public good, non-payers cannot be excluded, so nobody has a reason to pay.
Which best describes a demerit good?
So it is over-consumed if left to the market.
In a free market, merit goods are
People underestimate their benefits.
Which is a merit good?
Education benefits the person and society more than people allow for when deciding how much to buy.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Market failure: public, merit and demerit goods
Cambridge IGCSE Economics (9–1) 0987 · 8 marks · papermunch.org
Name ______________________________ Date ______________
Define market failure.[2]
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A situation where the price mechanism (market forces) fails to allocate resources efficiently.
Explain why private firms would not provide street lighting.[3]
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It is a public good. Nobody can be stopped from benefiting, so people would not pay for it voluntarily: they would be free riders. A firm could not earn revenue, so it would not supply it.
Explain why vaccinations are under-consumed in a free market.[3]
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They are a merit good. People underestimate the benefit to themselves and ignore the benefit to others, and some cannot afford them, so fewer are bought than is best for society.
Answers: Market failure: public, merit and demerit goods
- 1. A situation where the price mechanism (market forces) fails to allocate resources efficiently.
- 2. It is a public good. Nobody can be stopped from benefiting, so people would not pay for it voluntarily: they would be free riders. A firm could not earn revenue, so it would not supply it.
- 3. They are a merit good. People underestimate the benefit to themselves and ignore the benefit to others, and some cannot afford them, so fewer are bought than is best for society.