THEME 1 - Topic 7 - Public Goods And Information Failure

Question 1

Define a private good

Answer 1

Is one in which people can be excluded from consuming the good and consumption by one person means that the good is not available for consumption by another person.

Question 2

Define excludable

Answer 2

When other people can be excluded from consuming it.

Question 3

Define rivalrous

Answer 3

When a good is consumed by a person, it can’t be consumed by another person.

Question 4

Define a public good

Answer 4

A good which is non-excludable and non-rivalrous - consumers cannot be excluded from consuming the good, and consumption by one person does not affect the amount of good available for others to consume.

Question 5

Define non-excludable

Answer 5

When a good is provided, other people can’t be excluded from consuming it.

Question 6

Define non-rivalrous

Answer 6

When the consumption of a good by one person does not reduce the amount of good available for others to consume.

Question 7

Define a quasi-public good

Answer 7

A good which has characteristics closer to a public good than a private good, but is not a pure public good.

Question 8

Define the free-rider problem

Answer 8

Is when an individual can’t be excluded from consuming a good, and thus has no incentive to pay for its provision.

Question 9

Define information failure

Answer 9

Is a lack of information that results in consumers and/or firms making decisions which are not rational and do not maximise social welfare.

Question 10

Define asymmetric information

Answer 10

Occurs when information is not shared equally between 2 parties carrying out a transaction and and one party has better information about market conditions than the other.

Question 11

Define adverse selection

Answer 11

Is a situation in which a person at risk is more likely to take out insurance.

Question 12

Define moral hazard

Answer 12

Is a situation in which a person who has taken out insurance is prone to taking more risk.

Question 13

Define a merit good

Answer 13

Are goods which society feels are “good for you” and socially desirable. With the idea of information failure, a merit good is defined as a good that is better for a person than the person consuming the good realises.

Question 14

Define a demerit good

Answer 14

Are goods which society feels are “bad for you” and socially undesirable. With the idea of information failure, a demerit good is defined as good that is worse for a person than the person consuming the good realises.