5) Information Failure - MMT

Question 1

How do most world economies allocate resources?

Answer 1

Via the free market

Question 2

What do many economists believe about the free market?

Answer 2

That this is the only possible way to ensure resources are allocated efficiently

Question 3

What do most economies accept about the free market?

Answer 3

Most economies accept that there are times when the free market might fail to allocate resources in the best interests of society, when this happens market failure occurs

Question 4

When did market failure occur?

Answer 4

When the free market might fail to allocate resources in the best interests of society

Question 5

Define information failure:

Answer 5

A type of market failure where individuals or firms have a lack of information about economic decisions

Question 6

What are the 4 types of information failure?

Answer 6

1) Asymmetric Information failure
2) Moral Hazard
3) Merit goods
4) Demerit goods

Question 7

What is asymmetric information failure?

Answer 7

• Symmetric means 2 sided; asymmetric means one sided
• Asymmetric information failure occurs where one party has access to information that another party doesn’t

Question 8

What is an example of asymmetric information failure?

Answer 8

The seller of a car may know it has a problem, but the buyer may not be aware

Question 9

What is moral hazard?

Answer 9

A situation in which one party engages in risky behaviour or fails to act in good faith because it knows the other party bears the economic consequences of their behaviour

Question 10

What is a classic example of moral hazard?

Answer 10

A classic example in economics was of the banks prior to the 2008/09 financial crisis - they took massive risks, knowing that the government would step in to save them

Question 11

What are merit goods?

Answer 11

One of the most important concepts of them all, merit goods are goods (mainly services) that will be under-consumer by the public as they don’t fully appreciate their benefit

Question 12

What are the 2 most famous examples of merit goods?

Answer 12

healthcare and education as they are free at the point of use

Question 13

What are demerit goods?

Answer 13

These are the opposite to merit goods. Demerit goods are goods that will be over-consumed by the public as they fail to recognise the dangers that they can cause them

Question 14

What are the best examples of demerit goods?

Answer 14

Smoking, drinking and drugs etc

Question 15

Why does information failure lead to market failure?

Answer 15

Always go back to the basic explanation of market failure: is the level of production or consumption that the free market provides appropriate for the needs of society as a whole? For the vast majority of goods and services (eg tomato ketchup/haircuts) it is. However, due to information failure some goods and services are either over or under consumed

Question 16

Why if merit goods were only provided by the private sector world they be under consumed?

Answer 16

Private sector exists to make a profit, profit means customers have to pay the market price. If every child had to pay £6,000 per year it costs to educate them, would every child go to school? If merit goods are only provided by the private sector (free market) then they are under consumed

Question 17

If the price of beer was lower what would happen to the amount of beer consumed?

Answer 17

This would lead to more consumed, which would lead to an over consumption of beer with many subsequent health problems for millions of people, that’s why the government put taxes on beer meaning that about £2 out of £4 per pint goes to the government, not the pub or brewers

Question 18

What is the leading cause of market failure?

Answer 18

Information failure

Question 19

What does information failure cause?

Answer 19

Cause consumers to either over consume or under consume some goods and services