Further market failure

What is information failure?

Occurs when individuals and/or firms lack the right information to fully assess the private costs and benefits of an economic activity

What is the link between information failure and market failure?

If firms/individuals have sufficient correct info then the economic decisions that they make should be rational and lead to welfare maximising behaviour (Allocative efficiency)

If firms/individuals lack the full info to correctly assess the private costs and benefits of an activity then the outcome of any decision they make is unlikely to maximise society’s welfare.

Why does info failure occur?

• Consumers are often unaware of the full private costs of consuming particular products

• Consumers are often unaware of the full private benefits

• Pesuasive advertising may result in consumption levels that are not in the best interests of consumers

• Product packaging makes claims that are inaccurate and misleading

What are some examples of info failure?

• Uncertain quality of second hand products

• Knowledge of the nutritional content of foods

• Risks from using tanning salons

What is assymetric information?

Occurs where one party in the economic transaction has more information than the other.

What is an example of assymetric information?

The market for second hand cars, when selling a used car the owner is likely to have full knowledge about its service history etc

What are public goods?

Goods that have the characteristics of non-rivarly and non-excludability

What is non-excludability?

If one individual demands and purchases the good she cannot prevent anyone else from consuming it and enjoying the benefits.

How does a good being non-exludable give way to the free-rider problem?

Each individual has an incentive to let others pay for the good as they will be able to consume it once its provided.

What is non-rivalry?

Consumption of the good by one person will not reduce the amount of the good available to others

What are some examples of public goods?

• Radio broadcasts

• Street lighting

What is the difference between an optional public good and a non-optional public good?

With an optional public good consumers can choose how much they consume but they have no choice where non-optional public goods are concerned.

What are quasi-public goods?

Goods that have both characteristics from private and public goods.

What is an example of a quasi-public good?

A beach:

It is available to all those who wish to use it. However, it is possible to exclude consumers through privately owned beaches.

The beach is non-rivalry up to a point, if you are the first there on a sunny day, it does very little to your enjoyment. As the beach becomes crowded enjoyment may perceptibly reduce.

Why will quasi-public goods not be provided by the market?

The free-rider problem

Why will quasi-public goods be under-provided in the market?

The market can provide some of them-when they can be made rival and excludable. However, such provision would be in insufficient quantities.

What is sustainability?

When an economic activity meets the needs of the present without compromising the ability of future generations to meet their own needs.

What does the ‘Tragedy of the commons’ refer to?

An economic problem where individuals, acting independently according to their own self-interest, deplete or spoil a shared resource even though it is not in anyone's long-term interest for this to happen.

What are Common Property Resources?

A resource that can be used by everyone as there are no private property rights over the resource

What are some examples of Common Property Resources?

Common land, the oceans, the environment/atmosphere

What are property rights?

Rights of ownership enforceable by law.

The Tragedy of the Commons diagram

• Assume there are no external benefits, therefore MSB=MPB

• Social optimum is where MSC=MSB

• There are no private costs as this is a common property resource. Therefore all costs associated with its use are external so MSC=MEC

• As there are no private costs individuals will use a CPR up to the point where they no longer get any benefit where MPB=O

• Resulting in over consumption and a DWL