Market Failure & Externalities

Private Goods
A private good has three characteristics: - Excludability: Consumers of private goods can be excluded from consuming it by the seller if they are not willing or able to pay for it. For example a restaurant meal. - Rivalry: One persons consumption of a good reduces the amount left for other consumers. For example, buying a pizza means that it is no longer available for other consumers. - Rejectability: All private goods and services can be rejected as the tastes and preferences of the consumer change. For example, if the food at college isnt nice its possible to pay for something else.

Public Goods
A public good has two main characteristics: - Non excludability: Non payers of the good can enjoy the benefits of the good without paying. - Non rivalry: If the good has been consumed it doesnt limit another consumers ability to acquire and consume the good. An example of a public good is an online newspaper. Anyone can benefit from it as it is free and one person reading it doesnt limit another persons ability to read the newspaper.

Merit & Demerit Goods

Merit Goods: Goods the government deems to have positive externalities and so they subsidise them or make them free. Eg. Prescription medicine. Demerit Goods: Goods the government deems to have negative externalities and so they increase taxes on them. Eg. Cigarettes.

Market Failure
Market Failure is when a free market fails to allocate its resources efficiently.

Negative Externalities
Negative Externalities: Costs to third parties

Positive Externalities
Positive Externalities: Benefits enjoyed by society due to economic activity.