7) Information Provision - MB

Question 1

define information provision

Answer 1

information provision is when the government educates the public to help consumers make better choices

Question 2

market failure can arise from information…

Answer 2

information failure (especially asymmetric)

Question 3

is there a solution to information failure?

Answer 3

a solution to information failure is for the government to educate households and firms; information provision

Question 4

what does information provision help do?

Answer 4

helps firms and households to make better decisions

Question 5

… information is needed for a market to achieve allocative efficiency

Answer 5

symmetric information

Question 6

what does symmetric information improve?

Answer 6

equality because it prevents buyers and sellers from being exploited

Question 7

diagram:
why does information provision cause welfare loss?

Answer 7

the consumers overestimate the benefits of consumption leading to welfare loss

Question 8

diagram:
why is there market failure from information failure?

Answer 8

the market mechanism is failing to achieve allocative efficiency of scarce resources because the good is over consumed, as shown by Q0 being higher that Q1.

Question 9

diagram:
why is there a negative external benefit associated with the consumption of the good?

Answer 9

due to the negative externalities of consumption

Question 10

diagram:
how would you improve allocative efficiency?

Answer 10

to shift D0=MPB towards D1=MSB, and improve allocative efficiency, the government could provide information

Question 11

diagram:
what would improving allocative efficiency cause for consumers?

Answer 11

this would lead to consumers making better decisions about their purchases and, by better considering the implications of their actions, internalise the negative externality reducing market failure

Question 12

what are the advantages of information provision? (2 things)

Answer 12

1) cheap
2) pervasive

Question 13

how is information provision cheap?

Answer 13

advertising campaigns to provide information are relatively cheap to implement

Question 14

how is information provision pervasive?

Answer 14

firms can, with legislation, be forced to provide information on their packaging which the consumers cannot avoid seeing

Question 15

what are the disadvantages of information provision? (4 things)

Answer 15

1) ineffective against irrationality
2) limited impact
3) loopholes
4) Complex

Question 16

how is information provision ineffective against irrationally?

Answer 16

if consumers are irrational and acting against their best interests, for example addicts, the information provision may have limited impact as the price may be unchanged or even lowered

Question 17

how can information provision have a limited impact?

Answer 17

to fully correct market failure it may need to be used alongside other forms of market intervention

Question 18

how can information provision have loopholes?

Answer 18

manufacturers while obeying the letter of the law, may find ways around the spirit of the law. For example food manufacturers providing nutritional information based on an unreasonably small portion size

Question 19

why does information provision compare favourably to legislation?

Answer 19

can be imposed more quickly, at lower opportunity cost, and more effectively without legislation by threatening legislation if industry fails to self-regulate with suitable information provision

Question 20

why does information provision compare unfavourably to legislation

Answer 20

the size of market failure that can be tackled by information provision is smaller than legislation; if the negative externalities are very large, information provision may fail to adequately correct market failure