Chapter 6 Part 2 - Market Failure & Govt Intervention Flashcards
List 3 causes of imperfect information
- Ignorance
- Lack of information access
- Lack of clarity / Misunderstood information
Define imperfect information
Imperfect information occurs when buyers and/or sellers have incomplete, inaccurate or misunderstood information of the actual benefits and/or actual costs relevant to the transaction.
Outline the 5 steps in explaining how imperfect information leads to market failure
- Explain the (Actual / Perceived) Costs and (Perceived / Actual) Benefits of consumption.
- Explain how consumers choose output to maximise self-interest
- Explain divergence between MPCa & MPCp OR MPBa & MPBp (due to info failure)
- Explain how Qs is obtained (MSC = MSB), where MSC = MPCa and MSB = MPBa. (NOTE: ASSUME NO EXTERNALITY PRESENT)
- Explain how market failures (over/under consumption)
How can the government deal with market failure due to imperfect information?
- Command and control: Legislation on provision of information
- Moral suasion: Educating consumers
- Market-based: Taxes, subsidies
How does legislation on provision of information address market failure due to imperfect information?
Some sellers may without info regarding their products to increase sales. To keep consumers more informed of the product they are buying, regulatory body requires warnings label pertaining to potential hazards or side-effects be clearly printed or communicated to consumers, eliminating gap between MPCa & MPCp OR MPBa & MPBp.
Advantages:
- Legislation enables consumers to make more informed choices with regards to actual costs and benefits of consumption
Disadvantages:
- Consumers may not fully understand info provided due to use of technical language, or may choose to believe that warning labels are too exaggerated; making them not very responsive to info provided
How does educating consumers address market failure due to imperfect information?
Education informs consumers of actual costs and benefits of choices they make, reducing divergence between MPCa & MPCp OR MPBa & MPBp.
Advantages:
- If consumers voluntarily change consumption after knowing actual cost / benefits, outcome more permanent than providing incentives or disincentives to influence behaviour; less govt intervention needed
- Decision making is swayed by salience bias; campaigns and education can focus on key aspects that appeal to customers (such as family) so that they are motivated to act in the desired manner
Disadvantages:
- Effects from education takes time as it involves changing mindsets; effectiveness of education depends on how consumers respond to info given
- Costs to carryout campaigns may not guarantee a proportionate reduction in consumption (of cigarettes due to PED < 1 cos of habits); result in wastage of resources as cost is more than value of intended outcome
How does market-based policies like taxes and subsidies address market failure due to imperfect information?
They raise MPCp (taxes) or lower it (subsidies).
Although market-based policies do not address the root cause of info failure, they may be preferred due to their quick impact on consumer decisions.
Define equity
Equity occurs when there is fairness in the distribution of essential goods and services (e.g. healthcare, housing, transport).
State the relationship between equity and (allocative) efficiency.
In the case of goods with positive externality, govt intervention can lead to both equity and efficiency.
However, in the case of goods with negative externality, govt intervention can lead to conflict between equity and efficiency.
Define government failure
Government failure can be defined as the situation where government intervention causes outcomes to be even more inefficient or inequitable as compared to no intervention.
List down the possible causes of government failure
- Information gaps (over/under tax/subsidy)
- High admin costs
- Unintended consequences (e.g. carbon tax and cost of living -> equity)
- Political considerations (e.g. public pressure for free healthcare even though MEB is not sufficiently large)
