The Pros And Cons Of The Price System

The price system may not always operate efficiently, as society fails to achieve some goals.
The market mechanism does not achieve desirable results.
Lack of Competition
Externalities
Positive
Negative
Positive Spill overs
Public Goods, Merit Goods, Publicly Provided Goods
Income Equality

LACK OF COMPETITION:
Consumer sovereignty(power) is replaced by ‘big business sovereignty’.
Firms without competitors tend to restrict(limit) supply; this raises profits and prices, and reduces community wellbeing by wasting the resources and delaying innovation.

EXTERNALITIES (Third Party Effects):
This is a cost or benefit that is imposed on third parties (people other than the buyers and sellers of the good). It can also sometimes be called the ‘Spillover effect’.
Externalities can be either
Positive (beneficial spillovers)
Negative (harmful spillovers)
Negative:
Those that are detrimental to the third parties
A neighbours consumption of loud music may reduce your ability to study
Noise pollution caused by an aircraft
Smoke from a factory
Solutions to solving these ‘failures’ are:
Taxes (e.g. pollution taxes)
Regulations (to limit pollution)
Economists prefer a tax-based solution because it is more efficient.
Positive:
Those that are beneficial to the third parties:
Govt. expenditure in schooling benefits the whole of society, not just the students
Vaccinations provide a direct benefit to the patient and a spillover benefit to other people (less chance of contracting the disease).
Society encourages Positive Spillovers:
There are govt subsidies for attending school and being vaccinated against disease.
The regulations push the demand curve for positive spillover type commodities to the right, e.g.:
Laws about immunisation of infants
Laws about attending school

GOVERNMENT INTERVENTION
- Correct negative externalities - Direct controls & - Specific taxes
- Correct positive externalities - Subsidies & - Govt provision
MERIT GOODS:
Merit goods are products, such as education, which consumers may undervalue but which the government believes are ‘good’ for consumers as they exhibit positive externalities. Merit goods would therefore be under-provided in a pure free-market economy. People do not take account positive externalities when they decide how much to consume of a good so they may therefore under-consume the good.
PUBLIC GOODS:
Goods that would not be provided in a pure free –Market system. This is because they display the characteristics of non-rivalry and non-excludability. Non- rivalry means that consumption by one person does not reduce the amount available for another (e.g. street lighting) and non-excludability means that once the goods is

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