Information Failure

Question 1

Explain information failure using moral hazard an asymmetric information

Answer 1

Asymmetric Information - This is when there is unequal knowledge between consumers and producers. This can lead to the missalocation of resources, as faults in products can be sold to consumers, and therefore a faulty pproduct is missalocated.

Moral Hazard - An idividual takes on more risk, as they do not bear the full cost of the risk. E.G. Car insurance leads to riskier driving.

Market failure can occur due to asymmetric information. The best example of this is fast foods. Producers are aware of what is in the food and what damages it can do, whereas the consumer is not as aware. And therefore is less informed than the producer. Leading to information failure as the consumer does not know as much. Therefore taking a moral hazard as they are consuming goods without knowing the full risks they face.

Question 2

Define and explain the consumption and production of merit goods

Answer 2

Merit Good
* People underestimate the benefits and therefore under consume the good leaing to lower production. Usually has a positive externality.
Consumption of a merit good:
Severly underestimated and usually somehting people are unaware of the benifits to. This leads to lower consumption of the merit good.

Production of a merit good:
Because consumers are so unaware of the benefits, producers see it as useless to produce a lot of that good and therefore there is under production of the good. Leading to a missalovation of resources to demerit goods in the production secotr.

Example of a merit good:
Education

Question 3

Define and explain the consumption and production fo demerit goods

Answer 3

Demerit Good
* A good which harms the consumer and is consumed because people are unaware/ignore the costs of consuming the good. Usually has a negative externality.

Consumption of a demerit good:
Usually consumed as consumers are unaware/ignore the costs of consuming the good. Leadig to harm on the third party and consumers themselves. Usually addictive and therefore overconsumption of the good.

Production of a demerit good:
Over produced as consumers ignore the costs of the good. Therefore producers profit maximise and make more of the good. Leading to a missalocation of resources and therefore negative externalities arise.

Example of a demerit good:
Smoking

Question 4

Evaluate the consumption and production of merit goods

Answer 4

Merit:
Severly underestimated and usually somehting people are unaware of the benifits to. This leads to lower consumption of the merit good. Because consumers are so unaware of the benefits, producers see it as useless to produce a lot of that good and therefore there is under production of the good. Leading to a missalovation of resources to demerit goods in the production secotr.

Question 5

Evaluate the consumption and production of demerit goods

Answer 5

Demerit:
Usually consumed as consumers are unaware/ignore the costs of consuming the good. Leadig to harm on the third party and consumers themselves. Usually addictive and therefore overconsumption of the good. Over produced as consumers ignore the costs of the good. Therefore producers profit maximise and make more of the good. Leading to a missalocation of resources and therefore negative externalities arise.