1.7 Market failure: public goods and information gaps Flashcards
Why is there market failure in the commodity market?
- Volatile and fail to match supply with demand
- Supply price inelastic as depend on harvests and natural factors
- Time lag in response to change in price
- Volatility leads to uncertain incomes so people do not invest or leave the market, causing a contraction and failure
What are the characteristics of public goods? What are quasi-public goods?
Non excludable - benefits cannot be solely given to those who have paid and so the free rider problem is created
Non rival - consumption by someone does not cause the quantity to diminish so can provide further benefit to other consumers without further cost
Quasi public goods are near public goods as they have characteristics of a public good - they are semi-non rival e.g. a road as more consumers make more crowded and semi non excludable as it is possible to exclude non paying consumers e.g. charging entrance fee to bridges - can be either non rival or non excludable - not both.
Why are public goods underprovided?
valuation problem - consumers want low prices, firms want high prices, no price mechanism makes hard to value
In mixed economies they are provided out of tax revenues to avoid free riders
What are some examples of public goods?
- Lamp posts
- Vaccinations
- Flood defences
- BBC
- Online learning
- Policing
- Lighthouses
Why is it arguable that market failure is inevitable?
Infinite wants and needs with scarce resources means inevitable
Why is there market failure in provision of public goods?
- Private sector markets fail to supply the optimum amount of public goods
- Pure public goods not normally provided due to the characteristics and problems
- Up to the state to decide appropriate outputs estimating the net social benefit which can be hard.
What is state provision?
The government provides public goods and services funded through tax, usually on goods and services with positive externalities, or public goods - non rival/excludable
What are the benefits of state provision?
- Characteristics of public goods means should replace market
- Taxpayers contribute according to ability so all benefit
- Provides fair access to services
- Without it would not be provided at all
- Government services not profit motive so may be affordable
- May be more efficient due to EofS
- Reduces inequality
- Prevents underprovision and underconsumption
What are the negatives of state provision?
- Monopoly provides may lack efficiency as lack competition
- Opportunity cost - very expensive
- More bureaucratic and expensive to run
- Quality may vary - inequality
- No price mechanism to determine demand
- Governments may lack expertise in provision
What are information gaps?
It is assumed that consumers and producers have perfect information to make rational decisions such as price of competition and substitutes.
Information gaps occur when they do not have this and so people make sub optimal decision.
Symmetric information is when both have perfect information, asymmetric information is when one has more than the other
What causes information gaps?
- Misunderstanding true costs and benefits e.g. consequences of painkillers
- Uncertain about costs and benefits
- Complex information
- Inaccurate information
- Addiction
- Lack awareness
- Habitual purchase
Why may information gaps lead to market failure?
If sellers do not trust buyers they may charge higher prices to cover costs of bad transactions so honest buyers overpay and fail to maximise utility
If buyers are distrustful of sellers firms may have to drop prices as there is less demand so must make sales in other ways
What are some examples of imperfect information?
Landlords overcharging tenants
Car insurance do not tell risks of all premiums so people pay more
Students know more on how to get into better schooling
Doctors know more about drugs and treatment
Used car seller knows more than buyer
Insider information in financial markets
What is the diagrammatic way to demonstrate imperfect information?
Those with limited information have a higher marginal private benefit curve as the costs are higher, if they gain more information the benefit increases and equilibrium shifts downwards as lower costs and that
