Market and Behavior Failures

Question 1

Market Failure

Answer 1

Imperfect Information

Principal Agent Issues

Credit Constraints

Learning by Using

Regulatory Failures

Question 2

Behavioral Failures (Nonstandard Preferences)

Answer 2

Self Control Problems (unfulfilled plans to do the beneficial thing)

Reference Dependent (outcome utility based on reference point)

Question 3

Behavioral Failures (Nonstandard Beliefs)

Answer 3

Incorrect beliefs about the future

Question 4

Behavioral Failures (Nonstandard Decision Making)

Answer 4

Limited Attention (consumers under weigh)

Framing of Choices

Sub-optimal decision heuristics (rules of thumb)

Question 5

Policies to Address Market Failures

Answer 5

Pigouvian Tax

Pigouvian Subsidy

Information Provision

Improve regulation

Question 6

Policies to address Behavioral Failures

Answer 6

Information Provision

Clarify trade-offs

focus on losses instead of gains

Nudges (if don’t work use product standards and subsidies)