CIE AS SAMPLE ESSAYS
Classification of goods & services
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With the use of examples, explain the difference between public goods and merit goods and consider whether markets will always provide enough of both goods. [8]
Public goods are characterized by non-rivalry and non-excludability. Non-rivalry means that one person’s consumption of the good does not reduce its availability for others. Non-excludability means that it is difficult or impossible to prevent people from consuming the good once it is provided. Classic examples of public goods include street lighting and national defense. For instance, a streetlight illuminates a public area, and everyone can benefit from the light without reducing its availability for others. Similarly, national defense protects all citizens, regardless of how much each contributes to its provision.
Merit goods are those that are better for individuals and society than people may realize, often resulting in under-consumption and underproduction. This under-consumption is due to information failure, where people do not fully understand the benefits of the good. Examples of merit goods include education and healthcare. For instance, education is beneficial because it increases an individual’s knowledge and skills, leading to higher productivity. However, some people may undervalue education, not fully understanding its long-term benefits. As a result, without government intervention, the market may provide too little education.
In a market economy, public goods and merit goods are typically underprovided or not provided at all because of the lack of a profit motive.
Private firms may avoid producing public goods since they cannot easily charge individuals for their consumption due to the free-rider problem. For example, a private firm would not find it profitable to provide national defense, as they cannot exclude non-payers from the benefits.
Similarly, in the case of education as individual fail to realise the long term benefits of education, the demand for higher education will be small. Private education providers may focus on services that are profitable, leaving essential but less profitable services underprovided.
A mixed economy, which combines elements of both market and government intervention, may address these challenges better. Government intervention through taxation and direct provision, public goods such as defense can be provided. The government can intervene by subsidizing or directly providing public and merit goods to ensure that there is enough provision. For example, governments can provide free education to ensure that every child has access to schooling.
However, government intervention in a mixed economy is not without its challenges. The extent of government spending is often limited by budget constraints, and there may be inefficiencies in resource allocation. For instance, while the government might provide healthcare through public hospitals, resource shortages and long waiting times can still be an issue due to limited budgets.
In conclusion, market economy is likely to underprovide both types of goods due to the absence of profit motives and information failure, a mixed economy has a better chance of providing an adequate supply through government intervention. Nevertheless, the extent to which a mixed economy can provide enough of these goods depends on the availability of resources and effective government policies.
Explain why the provision of bus and local rail (mass transit) services in cities is classified as a private good and not a public good and consider why such services might only be provided by the private sector. [8]
Mass transit services, such as buses and local rail, are classified as private goods due to their characteristics of excludability and rivalry. Excludability refers to the ability of providers to restrict access to those who pay for the service, evident in ticketing systems. Rivalry means that one person’s use of a service can limit availability for others, particularly when capacity is reached, as seen during peak travel times.
These features explain why mass transit is primarily provided by the private sector. Operators can charge fares, creating a profit incentive that drives efficient management and operation of services. When a bus or train reaches full capacity, additional passengers cannot board, underscoring the rivalrous nature of these services and making them appealing to private companies.
In contrast, mass transit services do not qualify as public goods. Public goods are characterized by being non-excludable and non-rivalrous, allowing everyone to benefit without depleting the resource. The congestion and limited capacity of mass transit illustrate that its use can diminish availability for others, thus excluding it from the public goods category.
While mass transit is predominantly offered by private entities, these companies often focus on more profitable urban routes and may neglect rural or less profitable areas. To address this gap, government involvement—through subsidies or publicly operated transit systems—ensures that services remain available to all communities. Many cities successfully operate public transport agencies funded by taxes, demonstrating that a collaborative approach can effectively address urban transportation needs and extend services to underserved areas.
In conclusion, although private companies play a crucial role in the provision of mass transit, integrating public sector support can create more equitable and efficient solutions to urban mobility challenges. This balanced model can better meet the diverse needs of city residents and ensure accessibility for all.
a) Explain why demerit goods are over-consumed and merit goods are under-consumed. [8]
Demerit goods are defined as those that are considered undesirable for consumers, often resulting in negative outcomes that individuals may not fully realize. In contrast, merit goods are deemed desirable and beneficial for consumers, even if they do not recognize their true value.
Demerit goods tend to be over-consumed primarily due to imperfect information. Consumers may not be fully aware of the risks associated with these goods, such as the health implications of smoking or excessive alcohol consumption. For example, individuals might underestimate the long-term health risks of smoking, leading them to consume tobacco products more than is advisable. Additionally, factors like low income, poor education, low prices, and addiction can further drive the overconsumption of demerit goods. For instance, cheap alcohol may be more accessible to individuals with limited financial resources, encouraging excessive drinking.
On the other hand, merit goods are often under-consumed because consumers lack awareness of their benefits, also due to imperfect information. Many people may not recognize the advantages of preventive healthcare, such as vaccinations, which can lead to lower uptake rates. For example, individuals might overlook the importance of regular health check-ups, mistakenly believing they are unnecessary. Furthermore, factors such as low income and high prices can inhibit access to merit goods, preventing individuals from taking advantage of beneficial services like quality education or healthcare.
In summary, the overconsumption of demerit goods arises from a combination of imperfect information, socioeconomic factors, and the low prices of these goods, while the underconsumption of merit goods is influenced by a lack of awareness and accessibility issues. Understanding these dynamics is crucial for policymakers aiming to address public health and welfare challenges.