Where consumers lack the full information about the costs and/or benefits of a good and make choices that fail to achieve allocative efficiency
Asymmetric information
When some participants in a market have better information about market conditions than others
Moral hazard
When a person who has taken out insurance is prone to taking more risk
Merit goods
Generate positive externalities, left to the free market they are under produced/consumed, individuals may underestimate the private benefits of consuming the good and may be ignorant of the external benefits
Demerit goods
Generate negative externalities, left to the free market they are over produced/consumed, individuals may underestimate the private costs of consuming the good ad may be ignorant of the external costs
Consumption and production of merit goods
Provided by both the public and private sector, positive marginal cost to supply extra users, limited in supply so have high opportunity cost, rivalrous as consumption reduces ability for others to consume, excludable, can be rejected by those unwilling to pay
Consumption and production of demerit goods
Can lead to negative externalities, consumers may be unaware of these due to information failure, government may decide to intervene
