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Market Failure With De-Merit Goods

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Market Failure With De-Merit Goods This graph shows why the free market system fails when it allocates resources to industries which product de-merit goods. The three lines on the graph all stand for different things and by looking at all of them together we can see why the market fails to provide these goods. To put the graph in context let us say that this graph shows the benefit and cost curves for chemicals that are harmful to the environment but useful to the individual. The red line on the curve shows the marginal benefit to the individual for every extra unit of the chemicals bought. This benefit is reflected in how much the people will be willing to pay for the good. (This is why the y-axis is labelled cost/benefit as one can be used as a synonym for the other.) This line is much like the demand curve on a supply and demand graph. The blue line is the private costs to a company of producing every extra good. ...read more.


The social cost curve tries to take all of these into account. Driven by the free market system the companies will make and sell chemicals up to a point where the cost they pay for each unit is equal to what people will pay for them. As you can see on this graph when roughly 8 units are produced the cost of each additional unit is equal to the amount that a person will pay for an additional unit of the chemical. This means that the user is getting the amount of benefit they want. The company is getting the amount of money they want and every body is happy. This point is easily seen as the point where the private costs and benefit curves cross. The problem with this is that the costs on society are not included. We can see that if the social costs are included then the perfect amount to supply would be closer to 7. ...read more.


When you get a TB jab there is benefit to you; you don't catch the TB virus. However there is also a benefit to those around you who don't catch the virus from you. The benefit to these people is included in the social benefit curve as well as the benefit to the individual. If it were left to the free market, companies would only supply jabs up to a point where private costs equalled private benefit. This would mean that about 8 TB jabs would be produced. However society would benefit most if 9 TB jabs produced. If any more than 9 were produced then the cost to the society (In this case the cost to the individual and the cost to society are the same and are therefore shown with the same curve.) Would be more than the benefit that was received. We can see that once again the free market system has failed to supply the correct amount of a good for the maximum society benefit. If left to the free market system there would not be enough TB jabs produced. This is the case with all merit goods. ...read more.

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