Why do markets fail to provide public goods, and how does asymmetric information distort markets?
Public goods and information failure: non-rivalry and non-excludability, the free-rider problem, merit and demerit goods, and asymmetric information and moral hazard as causes of market failure.
An Eduqas A520 answer to public goods and information failure, covering non-rivalry and non-excludability, the free-rider problem and the missing market for pure public goods, merit and demerit goods, and how asymmetric information, moral hazard and adverse selection cause markets to misallocate resources.
Reviewed by: AI editorial process; not yet individually human-reviewed
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What this dot point is asking
Eduqas wants you to define public goods through non-rivalry and non-excludability, explain the free-rider problem and the resulting missing market, distinguish merit from demerit goods, and explain how asymmetric information (including moral hazard and adverse selection) causes market failure. These are the causes of market failure that go beyond externalities.
Public goods
Examples of pure public goods include national defence, street lighting, flood defences and a lighthouse: each can be consumed by everyone at once, and no one can be shut out.
Merit and demerit goods
Merit and demerit goods involve a value judgement (a normative element) about what is good for people, as well as the positive-economics externality argument. They justify subsidies and information campaigns for merit goods, and taxes, regulation and warnings for demerit goods.
Information failure and asymmetric information
Information failure means the price mechanism allocates resources on the basis of mistaken valuations, so markets such as insurance, healthcare and finance can fail without intervention (regulation, mandatory disclosure, or compulsory insurance to pool risks).
Examples in context
- National defence and flood defences. Pure public goods provided by the state because the free-rider problem makes private provision impossible.
- Vaccination and education. Merit goods, under-consumed by the market, so subsidised or provided free.
- Used cars and insurance. Asymmetric information causes the market for lemons (adverse selection) and over-claiming (moral hazard), addressed by warranties, disclosure and risk-rating.
Try this
Q1. Explain why street lighting is an example of a public good. [4 marks]
- Cue. Non-rival (one person seeing by it does not reduce the light for others) and non-excludable (you cannot stop passers-by benefiting), so the free-rider problem prevents private provision.
Q2. Explain how asymmetric information can cause market failure in the market for second-hand cars. [4 marks]
- Cue. Sellers know quality, buyers do not; buyers offer an average price, good cars leave the market (adverse selection), so the market is dominated by lemons and trades inefficiently.
Exam-style practice questions
Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Eduqas Component 1 20182 marksState the two characteristics of a pure public good.Show worked answer →
A 2-mark knowledge question, one mark for each characteristic.
A pure public good is non-rival (one person's consumption does not reduce the amount available to others) and non-excludable (it is impossible, or prohibitively costly, to prevent non-payers from consuming it).
Markers reward both precise terms. A common slip is to confuse non-rivalry with non-excludability or to give an example without naming the properties.
Eduqas Component 3 (micro) 202012 marksEvaluate the view that the free market will always under-provide public goods, so the government must provide them.Show worked answer →
A levels-of-response essay. Knowledge and application: define non-rivalry and non-excludability and explain the free-rider problem: because non-payers cannot be excluded, consumers have no incentive to pay, so no profit-seeking firm will supply the good and a missing market results (for example national defence, street lighting).
Analysis: develop why this means under-provision (often zero provision) and a case for state provision funded by taxation.
Evaluation: weigh that few goods are purely public (many are quasi-public and partly excludable through technology, for example toll roads), that the government faces a valuation problem in deciding how much to provide, and the risk of government failure. Conclude with a supported judgement, for example that pure public goods do require state provision, but technology and pricing can let markets supply many quasi-public goods.
Related dot points
- Externalities and the environment: positive and negative externalities in production and consumption, private and social costs and benefits, the welfare loss from market failure, and environmental market failure.
An Eduqas A520 answer to externalities, covering positive and negative externalities in production and consumption, the distinction between private and social costs and benefits, the deadweight welfare loss when marginal social cost differs from marginal social benefit, and why environmental problems are a classic market failure.
- Government intervention and government failure: indirect taxes and subsidies, maximum and minimum prices, regulation, tradable pollution permits and state provision, and the causes of government failure.
An Eduqas A520 answer to the policy toolkit for correcting market failure, covering indirect taxes and subsidies, maximum and minimum prices, regulation, tradable pollution permits, state provision and information provision, and the causes of government failure such as unintended consequences, information gaps and regulatory capture.
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Sources & how we know this
- Eduqas A Level Economics Specification (A520) — Eduqas (2015)