Ch. 9

• What is information failure in economics?

  Information failure occurs when consumers and/or producers do not have all the information when making decisions.
• What are the types of information failure?

  • Asymmetric information and moral hazard
  • Merit goods
  • Demerit goods
• Why is information essential for making economic decisions?

  Information is essential for evaluating costs and benefits and making informed choices.
• How does imperfect information lead to market failure?

  Imperfect information can prevent consumers from making informed choices, leading to market failure.
• What is an example of imperfect information?

  Risks from using tanning salons.
• What is asymmetric information?

  Asymmetric information occurs when one party has more or better information than the other party in a market.
• How can asymmetric information affect car purchases?

  It may lead to consumers buying cars with hidden problems due to lack of information.
• What is a merit good?

  A merit good is one that brings unanticipated benefits to consumers, leading to underconsumption in a free market.
• What is a demerit good?

  A demerit good is one that brings less benefit to consumers than expected, leading to overconsumption in a free market.
• What are the characteristics of a public good?

  • Non-excludability
  • Non-rivalry
  • Non-rejectability
  • Zero marginal cost
• What is the free-rider problem?

  The free-rider problem occurs when individuals cannot be excluded from consuming a good, leading to no incentive to pay for it.
• How does information failure lead to underconsumption of merit goods?

  Consumers are unaware of the true benefits of consumption, leading to underconsumption.
• How does information failure lead to overconsumption of demerit goods?

  Consumers are unaware of the loss of benefit from consumption, leading to overconsumption.
• What is moral hazard?

  Moral hazard occurs when a party with more information alters their behavior, causing extra costs for the other party.
• How does having insurance create moral hazard?

  Having insurance may lead individuals to take more risks, knowing they are covered.
• What factors affect the extent of market failure in merit and demerit goods?

  • Nature of the product
  • Externalities involved
  • Which consumers are affected
• What are the characteristics of a private good?

  A private good is excludable, rivalrous, rejectable, and has a marginal cost.
• What is a public good?

  A public good is non-excludable, non-rivalrous, and non-rejectable, with zero marginal cost.
• Give an example of a public good.

  Law enforcement (the police force).
• Why is law enforcement considered a public good?

  It is non-excludable, non-rivalrous, and non-rejectable, providing protection for all.
• What is the marginal cost of public goods?

  The marginal cost of public goods is zero.
• How does the presence of externalities affect merit and demerit goods?

  Externalities can require government intervention if the effects extend beyond the consumer.
• How do merit goods contribute to society?

  Merit goods contribute to society by providing benefits such as increased productivity and lower crime rates.
• How do demerit goods negatively impact society?

  Demerit goods can lead to poor health outcomes and increased societal costs.
• What are some examples of demerit goods?

  Smoking cigarettes, high-caffeine energy drinks, and alcohol.
• How do e-cigarettes fit into the category of demerit goods?

  1. cigarettes may have private costs and external costs, leading to potential negative impacts on health.
• What is the impact of merit and demerit goods on market failure?

  Merit goods lead to underconsumption, while demerit goods lead to overconsumption, both causing market failure.
• How does the government address the issues of merit and demerit goods?

  The government may intervene to correct underconsumption of merit goods and overconsumption of demerit goods.
• What is the role of education in relation to merit and demerit goods?

  Education informs consumers about the benefits of merit goods and the harms of demerit goods.
• How do externalities influence the consumption of merit and demerit goods?

  Externalities can affect the societal impact of consumption, necessitating government intervention.
• What is the significance of understanding information failure in economics?

  Understanding information failure helps identify causes of market failure and informs policy decisions.
• What are the characteristics of public goods?

  Public goods are non-excludable, non-rivalrous, non-rejectable, and have zero marginal cost.
• Why is law enforcement considered a public good?

  Because it is non-excludable, non-rivalrous, and non-rejectable, providing protection for all.
• What does it mean for a good to be non-excludable?

  It means that it is difficult to prevent anyone from using the good.
• What does it mean for a good to be non-rivalrous?

  It means that one person's use of the good does not reduce its availability to others.
• What does it mean for a good to be non-rejectable?

  It means that once the good is provided, individuals cannot opt out of its benefits.
• Why do public goods have zero marginal cost?

  Because adding one more user does not increase the cost of providing the good.
• What are some examples of pure public goods?

  • Sanitation infrastructure
  • Flood defence projects
  • Crime control for a community
  • Vaccinations reducing disease risk
  • Freely available online knowledge
  • Public service broadcasting
  • Community irrigation systems
  • National parks
• What is a common misconception about public goods in exams?

  Many students incorrectly define public goods as being provided by the government.
• What should students remember about public goods when they see the term in an exam?

  Public goods are both non-rival and non-excludable.