Microeconomics 2.9 Information Failure

Question 1

Information Failure

Answer 1

When consumes and or producers do not have all the information when making decisions, leading to market failure.

Question 2

Asymmetric Information

Answer 2

When one party (consumers or producers) has more or better information about a product than the other party

Question 2

Merit Good

Answer 2

Good that is likely to be underconsumed in a free market because the consumer does not anticipate all the benefits.

Question 2

Moral hazard

Answer 2

When one party (consumers or producers) changes their behaviour due to asymmetric information, which causes extra costs to the other party.

Question 2

Demerit goods

Answer 2

Good that is likely to be overconsumed in a free market because the consumer does not anticipate the lack of benefits.

Question 3

What is the difference between demerit and negative externalitities?

Answer 3

Externalities affect third parties outside of the market transations whilst demerit goods have an impact on the consumer.

Question 4

What does the extent of market failure due to merit and demerit goods depend on?

Answer 4

The nature of the product- some good have a bigger effect on consumers than others. The effect on third parties; which consumers are involved.

Question 5

If a consumer bought a new phone and insured it, how might a moral hazard be created?

Answer 5

If the consumer behaves in a more careless way because they have insurance.