Information Gaps

Question 1

Could lead to

Answer 1

misallocation of scarce resources, as demand would be different if consumers had symmetric/ perfect information, and as a result, the allocation of scarce resources in reality is flawed.

Question 2

Apply to merit goods

Answer 2

Consumers don’t fully understand how good a particular is good for them due to imperfect info caused by: info failure + asymmetric info. So there are positive externalities in consumption, so there is a misallocation of scarce resource, as we are not at the socially optimum level - pq.

Question 3

Apply to demerit goods

Answer 3

Consumers don’t fully understand how bad a good is for them due to imperfect info caused by info failure + asymmetric info. So there are negative externalities in consumption, leading to a misallocation of scarce resources as we are not producing at the socially optimum level - pq.