Information Failure

Question 1

Merit goods

Answer 1

The consumption of this good is more beneficial to individuals than they realize

Question 2

Market failure for merit goods

Answer 2

At Qm the actual benefit is greater than the perceived benefit (msb > mpb)
- so there is under consumption as people don’t fully know the benefits
- there is allocative inefficiency as firms are allocating too few resources to the production of something that does benefit society

Question 3

What is the market failure caused by?

Answer 3

Only caused by information failure as it takes a long time for people to recognize benefits

Question 4

Demerit goods

Answer 4

The consumption of this good is less beneficials to individuals than they realize

Question 5

Market failure for demerit goods

Answer 5

At Qm the actual benefit is less than the perceived benefit (msb < mpb)
- so there is over consumption as people don’t fully know the harms
- there is allocative inefficiency as firms are allocating too many resources to the production of something that does not benefit society

Question 6

What is the market failure caused by?

Answer 6

Only caused by information failure as not a true representation of the harms or due to flamboyant advertising

Question 7

Asymmetric information

Answer 7

A situation in which information is not shared equally between two partners carrying out a transaction

Question 8

Moral hazard

Answer 8

When the party with superior information alters their behavior in such way that benefits themselves while imposing costs on those with inferior information

Question 9

How has the internet affected information failure?

Answer 9

• internet has reduced information failure as can now access information and research
• fake news can be spread wider and fast
• labeling on packaging can reduce information failure

Question 10

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Evaluate the production and consumption of merit/demerit goods

Answer 10

1. Value judgement
- normative statements
- depends on what you perceive to be good or bad for you
- very subjective so it depends on the person

2. The strength of the merit/demerit good
- if the good is not that bad the difference between actual benefit and perceived benefit is much smaller

3. Information failure is reducing
- given the rise of the internet there is more access to information
- education is improving
- research is published and more accessible due to globalization
- more information given to younger children
- government campaigns and schemes for merit goods are put in place so people become more aware of benefits

4. Which group is consuming the good
- depends upon if people are consuming with moderation and so not a big problem

5. Not worse than government failure
- reading the same information makes people sceptical
- makes the gap between actual benefit and perceived benefit bigger
- don’t trust a political leaders as there is a lot of corruption