Chapter 9 Flashcards
What are public goods
A good that is non-excludable and non-rivalry, the consumption of the good does not effect the amount available to another individual
What is asymmetric information
A situation in which some participants in a market have better information about market conditions than others. Leads to market failure. - leads to misallocation of resourcs
What are private goods
Are excludable (price) and rival (limited)
Quasi-public goods
Goods that have characteristics of public and private goods, such as stage coach
Adverse selection
A situation in which a person at risk is more likely to take out insurance
Moral hazard
A situation in which a person who has taken out insurance is prone to taking more risk. They take more risk as they do not bare the full cost of that risk.
Merit goods and demerit goods also mentioned in this chapter
Free-Rider problem
When people benefit from a good or service without paying anything towards it. They pay less than the overall benefit, due to the non-excludable benefits
Solutions to the free rider problem
Increasing taxes to cover the costs of the free rider problem, appealing to people, changing to good to a private good, quotas to limit their usage, compensation
Public good provision
When the government may not directly provide it all, but makes sure that it is provided
What is an externality
An externality is the cost or benefit a third-party receives from an economic transaction outside of the market mechanism. In other other words it is the spill over effect the production or consumption of a good or service.
Symmetric information
This means that consumers and producers have perfect market information to make their decision. This leads to efficient allocation of resources
What is the principal-agent problem
Agents make decisions based on principle, but they are inclined to act on own self-interest
Consumption of demerit goods are caused by….
Information faliure, since consumers are not fully aware of the long-run implications of consuming the good.
Consumption of merit goods is undersupplied because…..
Information failure as the true benefits of consuming a merit good is not realised. They are underprovided in the free market
