Market Failure, Info failure & Public goods 3B

Question 1

Why info failure exists?

Answer 1

Underestimation of private benefit
Underestimation of Private cost

Question 2

Explain PDSAD for info failure underest private B

Answer 2

Underestimation of B
MPBperceived less than MPBactual=MSB

Question 3

Explain PDSAD for info failure underest private C

Question 4

Govt intervention for -ve ext or info failure

Answer 4

• Subsidies / Direct provision (for underest. or dk benefit)
• Taxes (for underest or dk cost)

Works for both
- Legislation
- Provision of info

Question 5

B & C for subsidies/ direct prov

Answer 5

B: Given by govt, for underconsumed goods (where MPBperc same as MSB=MSC)

C: Does not directly address root cause of info failure

Question 6

B & C of taxes

Answer 6

Compulsory payments to govt

Question 7

Describe + B & C of legislation

Answer 7

Imposed on producers

Rules & regulations as command & control measure to restrict consumption

• punitive measures in violators, via regular monitoring

HOW: Imposed on producers, pass laws

Question 8

B & C of prov of info

Answer 8

B: 1. Directly addresses info failure
- consumers more accurately value MPB of the good, consume more

2. Appeals to social responsibility to care for others

C: 1. Long term soln
- Encourages but does not enforce, takes time for effects to be felt, hard to change habits in short term

2. Costly
   - Financed by high taxes, disincentive argument on work & investment,
3. Uncertainty
   - Depends on receptivity of target audience, highly unpredictable

Question 9

Explain 3 problems of financing

Answer 9

DISINCENTIVE
- HIgh tax imposed to finance sub.
- Lower productivity capacity
- discourage investment

BUDGET DEFICIT
- Benefit of reducing budget deficit > gain in external benefit = misallocation of resources
- Lowers credit rating, less foreign investment

OPP COST
- Funded w. resources w other uses
- Loss in benefits > gain in benefits from subsidy, misallocation of resources

Question 10

3 characteristics of public goods

Answer 10

1. Non rivalrous
   - 1 additional person doesn’t diminish another’s ability to consume
2. Non excludable
   - Not feasible to exclude someone else from a good
3. Non rejectable (not impt)
   - inability to refuse

Question 11

How public goods lead to market failure

Answer 11

Non rivalrous -> additional cost of providing another = 0
MC = 0 efficient price = 0
NO PROFIT MOTIVATED FIRMS WILLING TO SUPPLY

Non excludable -> FREE RIDER PROBLEM

No supply & No demand -> no mkt