2.9 Information Failure

Question 1

What are demerit goods?

Answer 1

Goods that would be over-produced and over-consumed in a free market, due to an associated information failure, where buyers over-value the private benefit/utility of consuming the product

Question 2

What are merit goods?

Answer 2

Goods that would be under-produced and under-consumed in a free market, due to an associated information failure, where buyers under-value the private benefit/utility of consuming the product

Question 3

What are the types of information failure?

Answer 3

• Misleading or incomplete information
• Uncertainty of information
• Misunderstanding
• Complex information

Question 4

What is asymmetric information?

Answer 4

When one agent in an economic transaction has better information about a good/service than the other economic agent

Question 5

What is adverse selection?

Answer 5

Occurs as a consequence of asymmetric information, where an economic agent with superior information uses it to their advantage

Question 6

What is moral hazard?

Answer 6

The possibility that an economic agent will take more risk because other economic agents will bear some, or all, of the burden of their risk