Market Failure and Tragedy of the Commons

Question 1

What is a public good?

Answer 1

a good that is both non-rivalrous and non-excludable

Question 2

What is meant by a public good (explained)?

Answer 2

• non-excludable - no one can be excluded from consuming it
• non-rivalrous - one person’s consumption does not diminish the quality or quantity of another’s consumption

Question 3

What is meant by non-rejectability?

Answer 3

the collective supply of a public good for all means that it cannot be rejected by people

Question 4

What is a common resource?

Answer 4

a resource that no individual or organisation can lay claim to

Question 5

What is the ‘Tragedy of the Commons’?

Answer 5

the idea that individuals acting in their own best interest will overuse a common resource, leading to the depletion or degradation of this resource

Question 6

Why does the tragedy of the commons occur?

Answer 6

as the common resource is non-excludable but it is rivalrous

Question 7

What are three possible solutions to the tragedy of the commons?

Answer 7

• rules and regulations
• cultural norms
• creating property rights

Question 8

Give an example of a rule or regulation that would offer a solution to the tragedy of the commons

Answer 8

limiting the number of days that people can fish for

Question 9

What is a problem with using rules and regulations as a solution to the tragedy of the commons?

Answer 9

• often inefficient and ineffective
• limits the tragedy but rarely prevents it

Question 10

Give an example of how cultural norms could be a solution to the tragedy of the commons

Answer 10

(example)
- overfishing results in cultural disapproval
- one who honours the norms is repcted
- can be effective in relatively small, self-governing communities

Question 11

What is a problem with using cultural norms as a solution to the tragedy of the commons?

Answer 11

take a long time for cultural norms to develop

Question 12

Explain how the process of creating property rights offers a solution to the tragedy of the commons

Answer 12

• it makes the common resource excludable - therefore it makes the common resource behave like a private good
• e.g. tradable fishing allowances

Question 13

What is a problem with using property rights as a solution to the tragedy of the commons?

Answer 13

• the common resource may not stay in one place (e.g. fish)
• would need a multi-country system to be truly effective

Question 14

What is information failure?

Answer 14

Information failure exists when consumers and/or producers do not have access to all of the information when making decisions.

Question 15

Explain what is Asymmetric information and give an example

Answer 15

Assumetric information failure exists when one party has more or better information about a product than the other party. For example, at a car salesroom may sell you a car with problems at a higher price than they should as they have better information.

Question 16

Explain what is moral hazard

Answer 16

Moral hazard can occur in situations of asymmetric information when the party with more information alters their behaviour, which causes extra cost for the other party

Question 17

What is a merit good?

Answer 17

A merit good one where consumers may gain an added benefit that has not been anticipated. Private benefits are higher than consumers realise. They often have postive externalities associated with them They are under-consumed in a free market, market failure.

Question 18

What is a demerit good?

Answer 18

A demerit good is on where consumers may gain less benefit than has been anticipated. Demerit goods are often overconsumed in a free market.

Question 19

Evaluate the extent to which merit or demerit goods will lead to market failure

Answer 19

• The nature of the product - if sugary may have a greater effect
• Any externality that may also be involved
• Which consumers are involved