JC Economics Essay Allocative Efficiency & Merit Goods Model Answers
How many of you know that, with regard to the essays on Market Failure topic, JC H2 Econs learners sometimes have to explain the concept of market efficiency in your Economics exams in you part A essay, before you go on to discuss about the various market failures of imperfect information, market dominance, etc , in Part B?
Here is a common sample of a typical question on this section of efficiency that is common in the Prelim exams and also Cambridge A-Levels.
Question
(a) Explain in theory, how a market achieves allocative efficiency. (10)
(b) Discuss whether it is necessary for the Singapore government to provide both public and merit goods in order to achieve efficient allocation of resources. [15]
JC Economics Essay – Allocative Efficiency Concept
(a) Suggested Answer:
Explain the concept of allocative efficiency: This occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences. The condition of allocative efficiency (AE) is at an output level where the Price equals the Marginal Cost (MC) of production [P = MC]. This is because the price that consumers are willing to pay is equivalent to the additional satisfaction or marginal utility (MU) that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost.
Explain the free market equilibrium outcome: Use the market diagram to show how to arrive at an equilibrium price and equilibrium quantity.
[quantity demanded = quantity supplied or Qdd = Qss ]
Explain when the free market equilibrium outcome is also socially efficient.
(sketch the diagram to show the condition, MSB = MSC)
Marginal Social Benefit (MSB) = Marginal Social Cost (MSC). This can happen if the market outcome is also allocatively efficient outcome. It is possible if there are no positive or negative externalities. That is, marginal external benefit or MEB = 0, and marginal external cost or MEC = 0.
(More on the diagram in our Economics Intensive Revision programme.)
JC Economics Essay – Addressing Market Failure in Singapore
(b) Suggested Answer
Thesis: Explain why it is deemed necessary for Govt to provide public good and merit good to achieve a more efficient allocation of resources.
Explain how the presence of public and merit goods leads to the failure of price mechanism to achieve efficient allocation of resources without government intervention.
Public Goods – The non-rivalry and non-excludable characteristics of public goods make it impossible for a price be charged for the consumption of public goods. As a result, the free market, without government intervention, will not allocate resources for the provision of public goods which are essential for the economic welfare of the society as no private firms will be willing to supply these goods at zero price. Hence government will need to supply these goods to be though taxation. Note again that the supply is based on govt’s perceived demand. May not be accurate Over production misallocation of resources.
Merit goods – They are basically private goods, rivalrous and excludable. There are a few reasons why a government might consider some goods to be merit goods.
First, a good may lead to external benefits, that is, the benefit to the individual consumer is lower than the benefit to society as a whole. In this case, the analysis would be the same as a positive externality. Second, consumers’ perceived private benefit may be lower than the benefit perceived by the government. Hence the government may see need to supply this good to ensure a more efficient allocation of resources.
Anti-Thesis: Explain why it is not necessary for the government to provide merit goods.
Since merit goods are private goods, strictly speaking they need not be provided by the government. The solutions to merit goods are similar to those of positive externalities. The government may provide subsidies to alter the behaviour of private consumers; or it could use legislation to make an economic activity compulsory.
Another approach to encourage consumption of merit goods would be through public education. This is because merit goods are under-consumed because consumers either under-value their private benefits due to imperfect information Consumer ignorance can thus be rectified by the provision of information by the government. This can happen in the form of television advertisement to pamphlets to road shows.
Evaluation:
1. Provision of merit goods in emergency times. Eg is provision of hand sanitizers, masks, free oximeters, etc in Singapore in the situation of COVID-19 in 2020 and 2021.
2. Provision of merit goods when costs are severely underestimated or benefits are severely overestimated. Eg is free exercises trackers for Singapore Step Challenge, aka National Steps Challenge™ (Season 6 for Year 2021)
More judgement options to be discussed more in class (“,)
Conclusion:
In summary, it is not necessary for the Singapore government to provide merit goods. However, exceptions are when SG is facing an emergency (COVID-19), or when government wishes to encourage significant levels of change and participation (National Steps Challenge™), or when other economics objectives ( can be micro or macro) are also considered.
More essays on merit goods:
JC Economics Essay #53 – Market Failure & Demerit Goods
JC Economics Essay Series #52 – Merit Goods & Subsidy Policy
JC Economics Essay Series #29 – Private & Merit Goods
and more… See our JC Econs blog for more full length answers for all essays and also CSQs
Marking Scheme for JC Economics Essays
L3 (9-11)
For a comprehensive and detailed analysis of the various forms of government intervention, highlighting that they are different given different characteristics.
L2 (6-8)
For an undeveloped but accurate explanation of why the government needs to provide public goods but not merit goods
L1 (1-9m)
For an answer that shows some knowledge of concepts of public goods and merit goods but does not explain by the govt should / should not provide them.
Answer contains several conceptual errors
E2: (3-5m)
For an evaluative assessment based on economic analysis or empirical evidence
E1(1-2m)
For an evaluative not supported by analysis
For full sample answers and exam techniques on how to answer any MARKET FAILURE essays questions (so you don’t to have to attempt market mechanism, or worse market structures essays, join our JC Economics tuition lessons and quickly learn to secure that elusive distinction grade “A” now!