2.9 Information failure

• Information failure

  When an economic agent lacks the information needed to make a rational, informed decision.
• Demerit goods

  Goods with negative externalities.
• Merit goods

  Goods with positive externalities.
• Asymmetric information

  Where one party has more information than the other, leading to market failure.
• Moral hazard

  Where individuals make decisions in their own best interests knowing there are potential risks for others.
• People often think about the short term benefits/ costs. Individuals can fail to see the need to make provision for the future and for potential changes in their circumstances e.g. old age pension.
• The long term private benefits of merit goods are greater than their short term private benefits and the long term private costs of demerit goods are greater than their short term private costs
• • Information failure is about the individual, NOT the third party
• Merit good

  A) S

  B) D

  C) D1

  D) actual benefit

  E) perceived benefit

  F) market failure

  G) q

  H) q1

  I) p

  J) p1

  K) price

  L) quantity

  M) optimum allocation of resources

  
• Demerit good

  A) s

  B) D

  C) D1

  D) quantity

  E) Q

  F) Q1

  G) price

  H) p

  I) p1

  J) market failure

  K) optimum allocation of resources

  L) perceived benefit

  M) actual benefit

  
• The extent of the market failure for merit/demerit goods depend upon...

  1. The nature of the product. Some products have a bigger effect on consumers than others.
  2. Any externalities that may be involved. The effect is not just on the consumers but also on society and may require government intervention.
  3. Which consumers are involved. Some merit and demerit goods affect poorer members of society more than others.