6.6 Information Provision and Market Failure

Question 1

Draw diagram

How can negative advertising or information provision help solve de-merit good market failure?

Answer 1

Negative advertising or information provision in the form of TV campaigns, print advertising, changes to the school curriculum or packaging changes will help to solve de-merit good market failure where information failure is the root cause of the problem. Individual consumers who are now well informed when making decisions about smoking cigarettes for example will consume less, fully understanding how bad the product is for them shifting the MPB curve to the left from MPB to MPB+neg advertising which now equals MSB. The market will then operate at the socially optimum level of output at Q* with overconsumption and production issues solved and allocative efficiency attained.

Question 2

Draw diagram

How can positive advertising or information provision help solve merit good market failure?

Answer 2

Positive advertising or information provision in the form of TV campaigns, print advertising, changes to the school curriculum or packaging changes will help to solve merit good market failure where information failure is the root cause of the problem. Individual consumers who are now well informed when making decisions about using sun cream for example will consume more, fully understanding how good the product is for them shifting the MPB curve to the right from MPB to MPB+pos advertising which now equals MSB. The market will then operate at the socially optimum level of output at Q* with under consumption and production issues solved and allocative efficiency attained.

Question 3

Advertising/Information Provision is very costly

Cons/Evaluation

Answer 3

Advertising/Information provision is very costly. This is because for it to be successful, well targeted and spread to the masses, all forms of media outlets and public forums need to be used increasing the costs dramatically. There is a substantial opportunity cost involved therefore if surplus tax revenue does not exist. One can argue whether this is the most efficient use of tax payers money especially if the advertising doesn’t have a noticeable impact on consumer behaviour. Using this money to fund other market failure solving policies instead would be more productive. To counter this argument however, if this policy is used alongside taxation, revenue can be used to fund information provision providing both a short term and long term solution to de-merit good market failure.

Question 4

There is no guarantee that advertising or information provision will work as intended

Cons/Evaluation

Answer 4

There is no guarantee that advertising or information provision will work as intended. This is because the quality of the information or the advertising itself is poor, unclear and not well targeted at the mass consumer. Advertising or providing information is extremely costly and if unsuccessful, there will be little to no benefit derived from its use. Consequently the cost of implementing such policies will outweigh the benefits, government failure, where the pre-existing market failure remains with a worsening of the misallocation of resources.

Question 5

This is a long run policy; not as effective in the short term.

Cons/Evaluation

Answer 5

Advertising will not change consumer behaviour immediately. It takes time to educate the public enough to alter consumption habits and for consumers to react to information provided to them. As a consequence using this policy in isolation is unlikely to be successful. Rather, combining information provision with taxation or a subsidy is more likely work where a price change can act as an incentive for consumers to change their behaviour whilst information provision over time can make demand for the product more price elastic as consumers become aware of the benefits/dangers of consuming the good leading to a long run movement towards the socially optimum level of output.