Market Failure (Information Failure, Immobility and Equity)

Question 1

What are the MBPs used to address imperfect information?

Answer 1

• Taxes
• Free provision
• Subsidies

** quick impact on consumption patterns

Question 2

What is the C2 policy used to address imperfect information?

Answer 2

• Legislation on the provision of information

** helps consumers make more informed decisions

Question 3

What is the MS policy used to address imperfect information?

Answer 3

Educating consumers

Question 4

What is the policy used to address Adverse Selection when buyers have more information than sellers?

Answer 4

Governmental provision (usually insurance)

** high-risk buyers cannot exploit maximum claim limits

Question 5

What are the 2 policies used to address Adverse Selection when sellers have more information than buyers?

Answer 5

• Legislation of the Provision of Information
• Legislation to protect consumers

** allows consumers to claim for repairs, refunds, trades to improve the retail industry image

Question 6

Why does Moral Hazard cause Market Failure?

Answer 6

Buyers are often less risk-adverse after purchasing insurance.
Insurance companies would not want to insure and bear the high potential costs of the buyer’s actions.
A missing market is created.

Question 7

How is Moral Hazard addressed?

Answer 7

Co-payment
It disincentivizes less risk-adverse behaviour as consumers would have to partially bear the costs of their actions (Loss Aversion Bias).

Question 8

What can be done to address occupational immobility?

Answer 8

Increased skills training, education and upskilling schemes (Eg. Skill Development Fund provides grants to companies to train employees)

Question 9

What can be done to address geographical immobility?

Answer 9

• Improved transport and network systems
• Incentivize firms to relocate (workers will not incur high relocation costs)

Question 10

When does inequity occur?

Answer 10

Rising prices (caused by taxes, etc.) reduces the accessibility of goods to consumers, especially those in the lower income range.

Question 11

What are the 4 aspects of government failure?

Answer 11

CHIP
C - Unintended consequences (Eg. Inequity)
H - High administrative costs (Opp. cost, not worth)
I - Information gaps
P - Political considerations (Pressure from public, deviates from equity or allocative efficiency)