Distinguish between public goods and merit goods [10 marks]

Distinguish between public goods and merit goods. [10]

Public goods such as street lights are defined as goods which are non-excludable and non-rivalrous in consumption, while merit goods such as education are goods deemed socially desirable by the government. Street lights are non-excludable in consumption while education is excludable in consumption. Street lights are also non-rivalrous in consumption while education is rivalrous in consumption. In addition, the usage of streetlights causes complete market failure, while the consumption of education causes partial market failure.

Street lights are non-excludable in consumption while education is excludable in consumption.

It is impossible to prevent non-paying motorists from using street lights, but it is possible to prevent non-paying students from attaining an education.

Street lights are non-rivalrous in consumption, while education is rivalrous in consumption. One motorist’s usage of street lights does not reduce the amount of light made available to other motorists, but if one student takes up a place in the university, another student will be deprived of his education.

The usage of streetlights causes complete market failure while the consumption of education causes partial market failure. Since street lights are excludable in consumption, motorists would rather wait for other motorists to pay and provide for the good and this gives rise to a free-rider problem. Motorists are unwilling to reveal their effective demand and tend to understate it instead, making it difficult for firms to charge a price. In addition, once street lights are produced, the MC of providing them to additional motorists is zero. Since allocative efficiency occurs when P=MC, the efficient price is zero. However, profit-maximizing firms will not provide goods for free. Under the free market, street lights will not be provided, causing complete market failure.

The consumption of education leads to positive externalities. If literacy rates improve, more jobs will be created for the country as a whole and as income level rises, crimes such as thefts and robberies fall. All of these are not considered by students when they pursue an education. MEB causes MSB>MPB such that the market quantity where MPB= MPC is less than efficient quantity where MSB=MSC, creating a deadweight loss due to underconsumption. Under the free market, education is under-consumed, causing partial market failure.

Conclusion

Public goods differ from merit goods in terms of excludability and rivalry in consumption as well as the extent of market failure.

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