Chapter 9: Market failure: information failure and public goods Flashcards
Define asymmetric information
A situation in which some participants in a market have better information about market conditions than others
Give 5 examples of asymmetric information
- Healthcare
- Education
- Second hand cars
- Pensions
- The insurance market
Draw a diagram illustrating information failure and education
Figure 9.1
Define adverse selection
A situation in which a person at risk is more likely to take out insurance
Define moral hazard
A situation in which a person who has taken out insurance is prone to taking more risk
Name a situation where information deficiency can lead to market failure
Where some participants in a market have better information about some aspects of the market than others
What can asymmetric information result in?
Problems of adverse selection and moral hazard
Define merit good
A good that brings unanticipated benefits to consumers, such that society believes it will be under-consumed in a free market
Name 5 examples of merit goods
- Milk
- Education
- Museums
- Libraries
- Art galleries
Define demerit good
A good that brings less benefit to consumers than they expect such that too much will be consumed by individuals in a free market
What is there when identifying merit goods?
Strong normative element
Define private good
A good that, once consumed by one person, cannot be consumed by somebody else - such good has excludability and is rivalrous
Define non-excludability
A situation in which it is not possible to provide a product to one person without allowing others to consume it as well
Define non-rivalry
A situation in which one person’s consumption of a good does not prevent others from consuming it as well
Define public good
A good that is non-exclusive, non-rivalrous and non-rejectable - consumers cannot be excluded from consuming the good, consumption by one person does not affect the amount of the good available for others to consume, and once provided to all, no individual can reject it
