Economic Systems and Production Possibility Curves: Question 7

Worked solution

Part (a): Public goods versus private goods

Economists define a public good using two characteristics:

• Non-excludability: once the good is provided, it is not possible to stop anyone, including someone who has not paid for it, from benefiting from it.
• Non-rivalry: one person benefiting from the good does not reduce the amount left available for anyone else to enjoy at the same time.

The seafront footpath has both properties: nobody can realistically be stopped from walking along it, and one walker using it does not leave less of it for the next walker. This makes it a public good.

The loaf of bread, by contrast, is excludable, the bakery can simply refuse to hand it over until it is paid for, and rivalrous. Once one customer buys and eats it, it is no longer available for anyone else to consume. This makes it a private good.

Part (b): Merit and demerit goods

The vaccination is classified as a merit good. It gives benefits beyond the individual who is vaccinated, most importantly, it reduces the chance of the disease spreading to other people. On top of this, individual consumers, deciding for themselves whether to be vaccinated, are likely to underestimate the long-term health benefits to themselves, so left alone they would choose to consume less of it than is actually good for them.

Cigarettes are classified as a demerit good. Smokers tend to underestimate how harmful smoking is to their own long-term health, and their decision to smoke also imposes costs on other people, for example those exposed to second-hand smoke, and the wider healthcare system. Because both the harm to the smoker and the harm to others are greater than the smoker takes into account, cigarettes are classified as a demerit good.

Part (c): Under-consumption and over-consumption in a free market

Without government intervention:

• The vaccination would be under-consumed. Left to make their own decision, consumers weigh up only the private benefit they expect for themselves, which they tend to undervalue, and they have no financial reason to take into account the wider public-health benefit of reducing the spread of the disease to others. The free-market quantity consumed would therefore be lower than the quantity that is best for society as a whole.
• Cigarettes would be over-consumed. Smokers base their decision on the private satisfaction smoking gives them, underestimating the harm to their own future health, and they have no financial reason to take into account the costs their smoking imposes on others (such as passive smoking or pressure on healthcare services). The free-market quantity consumed would therefore be higher than the quantity that is best for society as a whole.

This is why governments commonly subsidise merit goods like vaccinations (to bring consumption closer to the socially desirable level) and tax or restrict demerit goods like cigarettes (to bring consumption back down towards it).

Final answers

• (a) A public good is non-excludable and non-rival (the footpath); a private good is excludable and rivalrous (the bread)
• (b) The vaccination is a merit good (under-valued personal and wider benefits); cigarettes are a demerit good (under-valued personal and wider harms)
• (c) The vaccination would be under-consumed, and cigarettes would be over-consumed, relative to the socially desirable quantity, if left entirely to a free market