Public Good and Asymmetric Informtion

Public Goods

Goods and services that are non-rivalrous and non-excludable

Non-rivalrous

when one person uses the good it doesn’t prevent from other consumers from using it

Non-excludable

once provided, producers cannot exclude anyone from benefitting even if they have not paid

Examples of Public Goods

streetlights, national defense

Examples of Quasi-public goods

public beaches

Examples of private goods

food, clothing, most bought products

2 types of gov intervention for public goods

Direct provision and contracting out

Free-rider problem

public can enjoy benefits without paying, prevents profit maximising firms from providing those goods as they cannot charge, causing a underallocation hence MF

Direct provision

government directly supplies

Direct provision advantages

Can fix market failure, allows large scale productions and economies of scale, public goods improve well-being of individuals and societies

Direct provision disadvantages

higher cost to finance (funded my tax), opportunity cost, government failure as they may not know whats best for society

Contracting out

Government pays specialist producer with expertise to produce public good

Contracting out advantages

Done by competitive tendering process to encourage low cost and high quality, access to specialist knowledge, skills, and capital in the private sector

Contracting out disadvantages

Gov loses a degree of control over public goods, cost of contracting may be greater than direct provision, dependent on quality of work, additional monitoring costs

Asymmetric information

A situation where one party has more/better info than the other party when making a transaction

2 problems of asymmetric information

Adverse selection and moral hazard

Adverse selection

Party with more info takes advantage of imbalance before transaction occurs

Adverse selection example

Volkswagen cheating on CO2 emission test which made buyers perceive it as an environmentally friendly car so more was bought

Adverse selection death spiral

High risk individuals purchase more insurance, low risk purchase less, total amount of contracts increases, premiums increase, low risk drop out due to high price, premiums increase, market collapses

Moral hazard

one party changes their behaviour as they become incentivised to take risks knowing they are insured against the costs involved

2 government interventions for asymmetric information

Legislation and regulation, provision of information

Legislation and regulations

health warnings, reporting, quality standards for food products

Legislation and regulations advantages

reduced misinformation as it allows people to make better informed decisions, ensures products meet quality standards

Legislation and regulations disadvantages

opportunity cost as it is time consuming

Provision of information

food labelling, medical fee schedule

Provision of information advantages

reduced misinformation as it allows people to make better informed decisions

Provision of information disadvantages

Opportunity cost as it is time consuming to collect info, may be ineffective due to outdated or inaccurate info

Private responses to asymmetric info

Signalling and Screening

Signalling

when the party with more info (seller) tries to convince buyers that its products are good quality

Signalling methods

Branding and franchising, warranties and guarantees, refund and return policies

Screening

when the party with limited info tries to gain more info about the other party

Screening methods

employers giving job applicants aptitude tests/background tests before hiring, insurance requesting for health records, consumers looking at reviews before purchasing