ecawns market failure

info failure + asymmetric

underestimate benefits (MPB) def

MPB p < MPB a

MSB>MPB p

—> UNDERALLOCATION

underestimate benefits (MPB) cause

myopic decision making

underestimate benefits (MPB) diagram

underestimate costs (MPC) - def

MPCp < MPCa

MSC>MPCp

→ overallocation

underestimate costs (MPC) - diagram

underestimate costs (MPC) - cause

addiction, myopic decision making

PIDQQD (P)

Priv costs, benefits

PIDQQD (I)

info gap

PIDQQD (D)

divergence between actual and perceived

P<A/ P>A

PIDQQD (Qp)

under estimation/ over est

QP<QS/QP>QS

PIDQQD (Qs)

under/over con/prod

social optimal qs

PIDQQD (Dwl)

dwl ABC

btw Qp and Qs, TSB>TSC / TSC> TSB

actual mpb/mpc not fully taken into account → distortion of price signals

X social optimal allocation

market failure

overestimate benefits - cause

1. persuasive advertising

2. product complexity (think they need stuff like RAM in laptops but dont)

overestimate benefits - diagram

govt int - imp info (2)

1. rules and regulatuons

2. public education

govt int - imp info - r&r

fx:

• consider priv cost and benefits

• reduce underestimation of mpc/mpb

• reduce allocative inefficiency

examples:

• food nutrition labels

• healthcare display medical charges openly

• cigarette health warnings

govt int - imp info - r&r - limitation

high admin costs, unsustainable

govt int - imp info - r&r - unintended conseq (2)

1. higher prices and poor quality

→ raising COP might compromise on quality

2. opp cost of implementation

govt int - imp info - public edu - fx

MPC and MPB perceived to actual

eg:

→ public campaign by health promo board

→ covid vaccine campaign

→ screen for life (SFL)

encourage health check ups

increase MPBp

decrease dwl

govt int - imp info - public edu - unint conseq

1. cost

2. opp cost

govt int - imp info - public edu - int conseq

directly target root cause → REAL

less exp in long run

politically favourable → regard consumer sovereignty

salience bias -> focusing on things more obvious

govt int - imp info - public edu - limitations

time lag

uncertainty of outcome → stubborness

asymmetric info - def

when 1 party has more info than other in an economic transaction

asymmetric info - problems

1. adverse selection

2. moral hazard

adverse selection (Def)

undesirable members of a pop of buyers and sellers engage in voluntary exchange

—> one know more, dw say

adverse selection - 2nd hand car market

-lemons (low quality) and cherries (high quality)

• lemons dominant in market

• lack of info = all cards assumed as medium quality

• low quality stay, high quality exit market

• further lower prices consumers willing to pay

• asymmetric info, less sold

• welfare loss

missing market: all cherries leave, only lemons left

adverse selection - health insurance

• healthy and unhealthy buyers

• unhealthy dont declare conditions -→ more likely to buy insurance

• treat everyone as average

• healthy want cheap, exit market

• unhealthy dominatory

• price increase

• unprofitable

  missing market: no companies want to sell insurance

govt intervention adverse selection

r&r - lemon law

r&r - lemon law

→ compulsory for used car dealers to send cars for inspection and certification

lemon law

→ consumer make claim for lemon within 6 mths

→ compulsory to repair/replace/refund/red price

→ if not, CASE (consumers association of sg) issue penalties

priv solutions

signalling

→ more informed convey info to less informed (eg warranties)

screening

→ more informed must provide less informed with info before transaction

moral hazard (def)

economic agents take greater risks than normal

→ resulting costs not borne by the agents themselves → hidden actions after transaction

moral hazard - example

health insurance

(people buy insurance, take other greater risk, think they have insurance anyw, cause excessive insurance payouts, companies exit market → missing market cuz not mutually beneficial)

moral hazard - govt int (rules and regulations)

eg in 2019

-→ law that removed full riders on new insurance policies, cannot pay nth for hospital bills → must pay 5%

moral hazard - priv solutions

insurance companies make co payments and deductibles mandatory

→ insurers include terms in their contracts

(eg fire insurance company insist sprinkler system)

govt considerations - limitations - asymmetric info (6)

info gap (Det lvl of co payment)

time lag

uncertainty of outcome

increase govt expenditure → unsustainable long term

(premium rates of low risk people increase, medishield life premiums increase, subsidies increase)

opp cost

asymmetric application → medishield life

basic and compulsory insurance → all citizens and PR → lower health care cost

—> for ADVERSE SELECTION: spread risk btw both risky and less risky consumers

deductible and co payment

—> MORAL HAZARD: buyer bear some cost