Micro 10 - Information Gaps and public Goods

Question 1

What are some examples of public goods?

Answer 1

• Flood defence scheme
• Street lighting
• Firework displays
• Lighthouses

Question 2

What are public goods?

Answer 2

Public goods are goods which have non-excludability and non-rivalry in their consumption

Question 3

What are the two main characteristics of public goods?

Answer 3

• Non-excludability
• Non-rivalry

Question 4

What is meant by non-excludability?

Answer 4

People cannot be stopped from consuming a good even if they haven’t paid for it. Public goods are also said to be non-rejectable

Question 5

What is meant by non-rivalry?

Answer 5

One person benefitting from a good doesn’t stop others from also benefitting. Its benefit is non-diminishable. This means that public goods have zero marginal cost, there’s no additional cost to extending the good to one more person

Question 6

What is meant by non-rivalry?

Answer 6

One person benefitting from a good doesn’t stop others from also benefitting. Its benefit is non-diminishable.
This means that public goods have zero marginal cost, there’s no additional cost to extending the good to one more person

Question 7

What are private goods?

Answer 7

Private goods are excludable (you can stop someone consuming them) and they exhibit rivalry

Question 8

What is an example of a private good?

Answer 8

A biscuit is a private good as if you eat a biscuit you stop anyone else from eating it

Question 9

What is the relationship between people wanting to consume and private goods?

Answer 9

Unlike public goods people have a choice as to whether to consume private goods

Question 10

What are the two types of public goods?

Answer 10

Some goods are pure public goods such as lighthouses. Others can exhibit the characteristics of a public good but not fully. These are known as non-pure or quasi public goods

Question 11

What is an example of a non-pure or quasi public good?

Answer 11

Roads appear to have the characteristics of a public good as they are often free for everyone to use and one person using a road doesn’t prevent another person from using it too. However tolls can make a road excludable by excluding those who don’t pay to use the road and congestion will make a road exhibit rivalry as there is a limit on the number of people who can benefit from the road at any one time

Question 12

What is the relationship between new technology and the characteristics of a public good?

Answer 12

New technology can change a good that once had the characteristics of a public good into a private good

Question 13

What is the relationship between public goods and the free market?

Answer 13

Public goods are under-provided by the free market

Question 14

What does the non-excludability of public goods lead to?

Answer 14

The free rider problem

Question 15

What is the free rider problem?

Answer 15

The free rider problem means that once a public good is provided its impossible to stop someone from benefitting from it even if they haven’t paid towards it

Question 16

What is the relationship between the price mechanism and free riders?

Answer 16

The price mechanism cannot work if there are free riders

Question 17

Why can’t the price mechanism work if there are free riders?

Answer 17

Consumers won’t choose to pay for a public good that they can get for free because other consumers have paid for it

Question 18

What are some of the problems caused by free riders?

Answer 18

• Consumers won’t choose to pay for a public good that they can get for free because other consumers have paid for it
• If everyone decides to wait and see who will provide and pay for a public good it won’t be provided
• It’s also difficult to set a price for public goods because it’s difficult to work out their value to consumers

Question 19

What is the difference between consumers and producers valuing the benefits of public goods?

Answer 19

Producers will tend to overvalue the benefits of a public good in order to increase the price that they charge. Consumers will undervalue their benefits to try to get a lower price

Question 20

How do the problems caused by free riders lead to market failure?

Answer 20

These problems caused by free riders mean that firms are reluctant to supply public goods which causes market failure. As a result governments will usually have to intervene to provide the public good

Question 21

What is the relationship between positive externalities and the free rider problem?

Answer 21

Positive externalities are a form of public good. They are consumed by those who don’t pay for them so they are an example of the free rider problem

Question 22

Define resource depletion

Answer 22

Resource depletion is the reduction of available natural resources due to their overuse

Question 23

Define resource degradation

Answer 23

Resource degradation occurs when natural resources are made less productive by human activity

Question 24

What is the tragedy of the commons

Answer 24

The tragedy of the commons is the idea that people acting in their own personal best interests will overuse a common resource without considering that this will lead to the depletion or degradation of that resource

Question 25

What is perfect information

Answer 25

Perfect information means that buyers and sellers are assumed to have full knowledge regarding prices, costs, benefits and availability of products

Question 26

What is symmetric information

Answer 26

Symmetric information is perfect information which is equally available to all participants in a market

Question 27

What will symmetric information allow in terms of the allocation of resources?

Answer 27

Assuming that buyers and sellers are rational in their behaviour this symmetric information will allow the efficient allocation of resources in an between markets

Question 28

What is asymmetric information?

Answer 28

Asymmetric information is when buyers or sellers have more information than each other.
Asymmetric information involves a lack of perfect information in a market.

Question 29

Why may a provider of a service have a lack of information?

Answer 29

Providers of some services have a lack of information because the thing they provide a service for is unpredictable

Question 30

What is moral hazard?

Answer 30

Moral hazard is another possible result of asymmetric information. This happens when people take risks because they won’t suffer the consequences themselves if things go wrong

Question 31

What is an information gap?

Answer 31

An information gap is where consumers, producers or the government have insufficient knowledge to make rational economic decisions

Question 32

How do information gaps lead to market failure?

Answer 32

Information gaps can lead to market failure due to either consumers or producers having more market knowledge than the other about a particular good or service. This means that there is an unequal balance upon which to conduct economic transactions between them

Question 33

What are the causes of imperfect information/information gaps?

Answer 33

• Misunderstanding the true costs or benefits of a product
• Uncertainty about costs and benefits
• Complex information when buying specialist products that some consumers will find difficult to understand
• Inaccurate or misleading information
• Addiction
• Lack of awareness