Chapter 9: Market failure: information failure and public goods

Question 1

Define asymmetric information

Answer 1

A situation in which some participants in a market have better information about market conditions than others

Question 2

Define adverse selection

Answer 2

A situation in which a person at risk is more likely to take out insurance

Question 3

Define moral hazard

Answer 3

A situation in which a person who has taken out insurance is prone to taking more risk

Question 4

Define merit good

Answer 4

A good that brings unanticipated benefits to consumers, such that society believes it will be under-consumed in a free market

Question 5

Define demerit good

Answer 5

A good that brings less benefit to consumers than they expect, such that too much will be consumed by individuals in a free market

Question 6

Define private good

Answer 6

A good that, once consumed by one person, cannot be consumed by somebody else - such a good has excludability and is rivalrous

Question 7

Define non-excludability

Answer 7

A situation in which it is not possible to provide a product to one person without allowing others to consume it as well

Question 8

Define non-rivalry

Answer 8

A situation in which one person’s consumption of a good does not prevent others from consuming it as well

Question 9

Define public good

Answer 9

A good that is non-exclusive, non-rivalrous and reject-able - 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

Question 10

Define non-rejectability

Answer 10

A situation in which an individual cannot avoid consuming a good

Question 11

Define free-rider problem

Answer 11

When an individual cannot be excluded from consuming a good, and so has no incentive to pay for its provision