Micro part 12- Information asymmetries, public goods, inequity

Question 1

What is imperfect info

Answer 1

1. where buyers or sellers don’t have the info that is available to make a decision.
2. May underestimate social costs or overestimate social benefits
3. For markets to be fully competitive there needs to be perfect info

Question 2

What is Asymmetric info

Answer 2

1. when there is unequal amount between buyers and sellers

Question 3

What is Moral hazard

Answer 3

1. when one party has greater amount of information than other parties, and the makes a decision in their own interest knowing there are risks and some of the costs may be paid by other economic agents

Question 4

What are the causes of information failure

Answer 4

1. Use of misleading/inaccurate info which means the costs/benefits are not truly represented.
2. Advertising may manipulate this, or fail to disclose info e.g. health impacts of smoking
3. Due to uncertain information meaning the costs/benefits are not known
4. Misunderstanding complex info
5. Asymmetric info and moral hazard

Question 5

How does Asymmetric info cause market failure

Answer 5

1. Moral hazard
2. consumers underestimate the net private and external benefits of merit goods
3. consumers overestimating for demerit good
4. Merit goods underprovided and demerit goods overprovided
5. In the diagram there is market failure since a merit good is being underprovided
6. Principal-agent problem where an agent acts on behalf of principal

Question 6

What is provision of merit goods by market mechanism

Answer 6

1. are underprovided by the market mechanism as consumers do not realise l.r. benefits.
2. They have positive externalities (SB > PB) and can be rival, excludable and rejectable

Question 7

What is provision of demerit goods by market mechanism

Answer 7

1. are overprovided by the market as there is info failure from consumers meaning negative externalities 2. (SC > PC) are not realised

Question 8

What do consumers often only consider

Answer 8

1. Often consumers only consider short term benefits.
2. the long term benefits of merit goods > short term benefits (e.g. education)
3. short term costs of smoking are less than long term costs

Question 9

Describe the classification of merit and demerit goods

Answer 9

1. The classification of these is a value judgement as it can be hard to put a numerical value on externalities. 2. Not every good that has negative externalities is a demerit good e.g. vehicle releasing fumes but not considered demerit

Question 10

What are private goods

Answer 10

1. Private good – a good which has the characteristics of excludability, rivalry in consumption and rejectability

Question 11

What are public good

Answer 11

1. a good which has the characteristics of non-excludability, non-rivalry in consumption and non-rejectability

Question 12

What are quasi-public goods

Answer 12

1. Quasi-public – doesn’t perfectly hold the above characteristics but isn’t a private good

Question 13

What are the characteristics of public goods

Answer 13

1. Non-excludability – the benefits derived cannot be confined to solely those who paid for it.
2. Non-rivalry in consumption – one person consuming does not reduce quantity available for consumption to another consumer. The MC of supply is 0
3. Non-rejectable – once consumed it is unavoidable (even if a consumer has not consumed it)

Question 14

Describe non-excludability

Answer 14

1. Non-payers can enjoy benefits with no financial cost, giving way to the free-rider problem:

Question 15

What is the free-rider problem

Answer 15

1. if provision of public goods were left to market then there would be market failure
2. In a free market there is competition so firms want to avoid all costs possible
3. impossible to stop non-payers from enjoying the benefits so little incentive to pay for consumption, as someone else can do it
4. demand is there but supply won’t meet it
5. gov. must provide as they act in society’s best interest (but funded by tax so could still be underprovided)
6. can be solved for quasi-public goods e.g. toll booths on roads can make it excludable
7. producers overestimate benefits (increased price) whilst consumers undervalue (reduced price)

Question 16

How do governments intervene with public goods

Answer 16

1. Non-rival/excludability nature means the government should provide
2. Prevent underprovision/consumption to increase societal welfare
3. Can provide it more efficiently due to EoS
4. Increase access to services for low-income earners when providing a good not aiming to make profit which can increase s of l and equality

Question 17

Define wealth

Answer 17

1. Wealth – stock of assets

Question 18

Define income

Answer 18

1. Income – money received on a regular basis

Question 19

Define equity

Answer 19

1. Equity – fairness (acceptable distribution) which could be subjective

Question 20

Define Equality

Answer 20

1. Equality – equal distribution of wealth/income in a society

Question 21

What are Causes of wealth inequality

Answer 21

1. Inheritance means inequality is perpetuated between generations
2. Income inequality since those with high incomes can save and earn interest through this
3. Rising house prices increases the wealth of those with houses, whilst making it harder for those with houses to enter the housing market – intergenerational

Question 22

What are the Causes of income inequality

Answer 22

1. Those with high wealth can increase their savings and earn more from interest
2. Changes in the structure of the economy
3. Differences in human capital (degree?)
4. More trade liberalisation
5. Degree of gov. support e.g. regressive vs progressive tax system? Benefits?
6. Inequality in ages as those in part time work are more likely to be underemployed and earn a lower wage

Question 23

How can changes in the structure of the economy lead to income inequality

Answer 23

1. as those in low supply jobs can demand higher wages, likely when they’re more skilled.
2. Deindustrialisation has created a hysteresis effect, workers out of work for a long time so skills decrease even more

Question 24

How does more trade liberalisation lead to income inequality

Answer 24

1. means more trade between developed and developing countries,
2. so goods that can be produced with unskilled labour (in developing countries) can be imported to the developed country more cheaply
3. leaving lower wages for those in unskilled jobs as demand will be lower

Question 25

What are some advantages of inequality

Answer 25

1. Incentivises working hard to get a better paid job which can increase productivity
2. Incentivises entrepreneurship since it offers substantial reward but with risk – otherwise no incentive to do so (increase investment)

Question 26

What are the Costs of inequality

Answer 26

1. Distribution of income influences consumption patterns
2. Means more poverty so less people in education as can’t afford = reduced human capital of society
3. Can create debt bubbles as those on low incomes must borrow to achieve high s of l or compensate for volatile incomes. Can lead to debt spirals
4. Low tax revenue since capital gains tax is lower than income tax.

Question 27

How can inequality influence consumption patterns

Answer 27

1. as higher earners have a higher propensity to save.
2. Low incomes have consumption led by necessity.
3. Creates lower AD

Question 28

How does inequality lead to low tax revenue

Answer 28

1. Rich have a lower MPC so consumption tax receipts reduced.
2. Can further reduce gov. spending increasing inequality even more as less education/health

Question 29

Describe what Differences in access to resources leads to

Answer 29

1. Those with low income cannot afford to pay for education.
2. If have lower incomes then cannot afford to pay for goods they need like healthcare. This can cause them to be underprovided so resources are not allocated efficiently and there’s market failure

Question 30

What does inability to be able to afford to pay for education lead to

Answer 30

1. This means their human capital is lower and have low productivity.
2. This means their incomes will continue to be low and so the same will happen for their children

Question 31

How is the unequal distribution of income a consequence of market failure

Answer 31

1. since the free market has led to this inequitable distribution
2. e.g. prices too high for merit goods so there is a misallocation of resources.
3. This means a redistribution of income would lead to an allocation of resources that increases societal welfare
4. benefit to someone on low income from an additional £1 of income is greater than the loss of £1 of income of a high income earner as it makes up a much smaller % for them