12 Information failure

Question 1

Information failure

Answer 1

when consumers and/or producers do not have all of the information when making decisions leading to market failure
- Asymmetric information
- moral hazard
- merit goods
- demerit goods

Question 2

Asymmetric information

Answer 2

• when one party (consumers or producers) have more or better information about a product than the other party
• consumers pay larger price than they should when they have less information
• producers receive a smaller price than the should have with less information

Question 3

moral hazard

Answer 3

• when a party (consumers or producers) changes their behaviour due to Asymmetric information, which causes extra costs to the other party
• laptop that is not insured then owner will take more care with it than owner with insursnce

Question 4

merit goods

Answer 4

• good that is likely to be under consumed in a free market because consumer does not anticipate all the benefits

Question 5

demerit goods

Answer 5

• good that is likely to be over consumed in a free market because consumer does not anticipate all the benefits

Question 6

evaluation of merit goods and demerit goods

Answer 6

• the nature of the product - product may be under or or over consumed but some have a bigger effect on consumers like sugary drinks and obesity
• externalities may be involved - affect society not just consumer
• which consumers are involved - affect poorer members of society more than others