2. They may subsidise private firms, covering all costs, to provide the good.
Under-supply of merit goods
Merit goods are goods that will be underprovided by the market and, because of this they will be under consumed. Government thinks providing positive benefits for both the people and society, and that u-s goods should be consumed to a greater degree. E.I Education. Governments will attemt to increase the supplyy, and thus the consumption of merit goods. How they do this depend on how important they think the merit goods are. Education will be provided with alot of help from taxpayers. But sport faculties may only get some subsidized.
Over-supply of demerit goods
Demerit goods are goods that will be over provided by the market and because of this they will be over consumed. Goverment would like them to be consumed in a lesser degree or not at all. Examples, cigaretts, childponografy. They can ban, make it illigal (black markets may appar), attracted by the chance to make profits by fulfilling an on going demand. Some can be taxed, i.e cigaretts.
The existence of externalities
An externality occurs when the production or consumption of a good or service has an effect on a third party. If this effect is harmful we talk about negative externalities. There is an additional cost that must be added to the private cost of the producer or consumer to reflect the full cost to the society. If the effect is benaficial, its a beneficial ecternality.
Externalities are split into four types:
Nagative extarnalities of production/external cost
Positive extarnalities of production/external benefits
Nagative ecterbalities of consumption
Positive externalities of consumption
Negative externalities of production:
Damaging to the third party. Normally environmental problems. When the cost of the community is bigger than the cost of production for the firm. The firm has a private cost, but in addiotion to that creating an external cost. MPC<MSC. The government can: Tax the firm, they could ban, could issue tradeble emission permits.
Tradeble emission permits:
The government dicides upon a level of pollution each year. Give TEP to individual firms (a max pollution) and then they can buy from each other.
Positive externalities of production:
benefit the third party. E.I a training at a job.
Nagative externalities of consumtion
Consumed by individual negativly affects the third party. E.i. Cigaretts. Government can ban smoking. Government can impose indirect tax smokes. Government can advertice and educate in the dangers in smoking.
Positive externalities of consumption
provide external benefits to the third party. E.I. Health care. MSB>MPB. Government wiching to increase the consumtion can: Subsidize the supply of health care. Positive adverticing. Have laws that say you have to have health care.
COMMON POOL REASOURCES.
Reasources that are difficult and expencive to exclude people from.
