1.3 Market failure (public goods and information gaps)

Question 1

What are public goods?

Answer 1

Goods that are not provided by the free market and government intervention is needed to change this

Question 2

What are the two key characteristics of public goods?

Answer 2

• they are non-rivalry
• they are non-excludable

Question 3

What does non-rivalry mean (in the context of public goods)?

Answer 3

one person’s use of the good doesn’t stop someone else from using it

Question 4

What does non-excludable mean (in the context of public goods)?

Answer 4

someone not paying for a good doesn’t affect their ability to consume it

Question 5

What is a good example of a public good?

Answer 5

A street light

Question 6

Why might public goods not be provided by the private sector?

Answer 6

• due to the free rider problem
• due to the difficulty of pricing public goods

Question 7

What is the free rider problem?

Answer 7

• the fact that it is impossible to exclude the benefits of a public good from someone
• so people that don’t pay for the product will receive the same benefits as those that do, so producers can’t be sure of making a profit
• this disincentivises people from producing a good in the free market

Question 8

Why are public goods difficult to price?

Answer 8

As producers may overvalue the product, and consumers undervalue

Question 9

What is a free rider?

Answer 9

someone who receives the benefits of a good without paying for it

Question 10

Who are public goods provided by and how are they financed?

Answer 10

they are provided by the government and financed through taxation

Question 11

Why is information very important for purchase decision-making?

Answer 11

As purchases are based on a belief that a particular good or service will provide satisfaction, and these beliefs are based on information

Question 12

When does a situation of asymmetric information happen?

Answer 12

when one party has superior knowledge compared to another

Question 13

When does a situation of symmetric information happen?

Answer 13

it occurs where buyers and sellers have potential access to the same information

Question 14

Why does most advertising lead to information gaps?

Answer 14

as it is designed to change the attitude of the consumers to encourage them to buy the good

Question 15

How do information gaps lead to market failure?

Answer 15

as there is a misallocation of resources because people do not buy things that maximize their welfare, so consumer demand or producer supply for a good or service may be too high/low

Question 16

What is an example of information gaps?

Answer 16

drugs, where users do not see the long term problems

Question 17

What is the principal-agent problem?

Answer 17

when the goals of the principle (the person who gains/loses from the decision) are different from the agents (those making decisions on behalf of the principle)