Unit 1: Public goods and Information

• What is the difference between private and public goods?

  Private goods are produced by firms to generate profit; public goods are non-excludable and non-rivalrous that benefit society
• How can goods be excludable?


  Private producers can prevent those who haven't paid for it from consuming
• How can goods be rivalrous?


  When the consumption of a certain good prevents or reduces the consumption of another good; or when consumers have to compete for consumption as the supply is low
• Why won't firms provide public goods?

  They are non-excludable and non-rivalrous
• How are public goods non-rivalrous?

  The quantity of the good doesn't diminish after consumption, thus consumers are not competing to consume it
• How are public goods non-excludable?

  No price can be charged for the good: 1) The benefits of consuming the good cannot be confined to what the individual can pay; 2) There's no efficient way to price it
• How is the price mechanism related to public goods?


  The price mechanism cannot exclude customers
• How is the price mechanism related to private goods?

  The price mechanism is used to exclude consumers
• Examples of public goods

  Street lights, Beaches, etc
• The free-rider problem


  When customers realize they can access goods without paying for them as they will be benefitting from the payment of other consumers
• How can the free-rider problem be solved?

  By making goods quasi public
• What are quasi-public goods?

  Goods that have characteristics of both private and public goods; they are non-excludable but they are rivalrous
• How do information gaps impact markets?

  They distort market outcomes
• What is an underlying assumption about the free market?


  That the information is perfect
• What is perfect/symmetric information?

  When producers and consumers have the same level of information about a good or service
• What is asymmetric information?


  When consumers and producers have different levels of information
• What impact does asymmetric information have on markets?

  It distorts prices and quantities in markets, causing a over or under provision of goods
• In which situations does imperfect information cause misallocation of resources?

  Market failure (merit & demerit goods, unawareness of COP, and advertising)
• How does imperfect information affect merit and demerit goods?

  Demerit goods are sold in higher quantities (over-provision) as people are unaware of the effects of their consumption
• How does imperfect info affect advertising?

  Firms lie about their product and its value, which results in consumers overvaluing the product. The internet has made it harder for people to fall victims to lies
• How does imperfect info affect COP?

  Small enterprises are unable to be aware of their costs, which results in selling something under the price