Market Failure 1.3

Question 1

Information failure

Answer 1

Occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices.

Question 2

Symmetric Information (SAME)

Answer 2

For markets to work best, there needs to be symmetric information i.e. consumers and producers have the same level of knowledge

Question 3

Asymmetric Information (DIFFERENT)

Answer 3

Asymmetric information occurs when somebody knows more than someone else in the market. The imbalance can distort choices.

Question 4

Examples of Information failure

Answer 4

People using tanning beds- Don’t know the risks of skin cancer
Cowboy builders- People don’t know specifics and so will charge extra, taking advantage

Question 5

Government policies to correct information failure

Answer 5

Simplify proof of costs
Pass laws to give customers rights
Force publication of data
Establish Regulations
National curriculum- change to provide correct information needed

Question 6

Limitations to providing information to try correct failure

Answer 6

People may ignore
Expensive to provide e.g advertisements
People may not be willing to change
Information is constantly changing

Question 7

Public goods

Answer 7

Cause market failure due to the problem of missing markets. They are something that is non rival and non excludable

Question 8

Private goods

Answer 8

Covers most types of goods. Consumption by one individual means that it’s not available for another to use. They are both rival and excludable

Question 9

2 Main ways to identify if a good is private or public: Non-excludability

Answer 9

Benefits derived from pure public goods cannot be confined solely to those who have paid for it

Question 10

2 Main ways to identify if a good is private or public: Non-rival

Answer 10

Can be consumed by multiple people simultaneously without reducing the availability of the good for others

Question 11

Externalities

Answer 11

Major causes of market failure and are in every market
Spill over effects from consumption for which no appropriate consumption to effected third party is paid

Question 12

Negative externalities

Answer 12

Where the action of one group results in a negative side effect/ impact on a third party

Question 13

Welfare loss

Answer 13

Caused by demerit goods, welfare: how much society is being hurt by overproducing and over- consuming demerit goods

Question 14

Causes of Market Failure

Answer 14

Externalities
Information failure
Monopolies
Market price not at Socially Optimum Position (SOP)

Question 15

Merit Goods

Answer 15

Cause positive externalities