Causes & Consequences (CIE IGCSE Economics)

Demerit Goods

• These are goods which have harmful impacts on consumers/society
• They are often addictive
• E.g. Gambling, alcohol, drugs, sugary foods/drinks

• They are over-provided in a market and their consumption often creates external costs
• Governments often have to regulate these goods in such a way that they raise the prices and/or limit the quantities consumed

Merit Goods

• These are goods that are beneficial to society but consumers under-consume them as they do not fully recognise the private or external benefits
• E.g. Vaccinations, education, electric cars

• They are under-provided in a market & their consumption generates both private and/or external benefits
• Governments often have to subsidise these goods in order to lower the price and/or increase the quantities consumed

Public Goods

• Public goods are beneficial to society but would be under-provided by a free market as there is little opportunity for sellers to make profits from providing these goods/services as they are non-excludable and non-rivalrous in consumption
• Good examples include national defence, parks, libraries and lighthouses

• Non-excludability refers to the inability of private firms to exclude certain customers from using their products. In effect, the price mechanism cannot be used to exclude customers e.g. street lighting
• Non-rivalry refers to the inability of the product to be used up, so there is no competitive rivalry in consumption to drive up prices and generate profits for firms
• Therefore, governments will often provide these beneficial goods themselves, and so they are called public goods

Abuse of Monopoly Power

• The development of monopoly markets is a natural outcome of a market system
• Firms seek to eliminate competition by buying out competitors & increasing their ownership of factors of production
• With less competition, firms can raise prices, reduce the choice available to consumers, or limit the supply
  
  

• The outcome is that goods/services are purposely under-provided in order to raise prices and profits
• Governments often intervene to ensure that there is healthy competition in markets & sufficient provision of goods/services

• Factor immobility occurs when it is difficult for factors of production to move or switch between different uses/locations
• The two main types of factor immobility are the geographical & occupational immobility of labour
  
  

• Factor immobility results an inefficient allocation of resources in a market (usually under-provision)
• Governments often implement programs to reduce the factor immobility in order to raise production & output

• Externalities occur when there is an external cost or benefit on a third party not involved in the economic transaction
• These impacts can be positive or negative
• The price mechanism in a free market ignores these externalities
• If these external costs/benefits were acknowledged, then the price and output in the market would be different

• A positive externality of consumption occurs when there is a positive external benefit in consumption, such as when electric vehicles are consumed CO2 emissions fall
• A positive externality of production occurs when there is a positive external benefit in production, such as when managed pine forests produce timber but also increase CO2 absorption
• A negative externality of consumption occurs when there is an external cost in consumption such as when the consumption of alcohol increases anti social behaviour
• A negative externality of production occurs when there is an external cost in production such as when the production of electricity increases air pollution