Other reasons for intervention
Public, merit and demerit goods
- public good — non-rivalry + non-excludability → free-rider problem → firms supply none (total failure).
- merit good (education) is under-consumed; demerit good (cigarettes) is over-consumed.
- People misjudge them because of information failure.
Practice
Private firms fail to supply public goods because of:
Non-excludability lets people free-ride, so firms cannot profit and supply none.
Monopoly & asymmetric information
- A firm with monopoly power can cut output and raise the price above the competitive level — wasting resources.
- Inequality — the market rewards resource owners, leaving some with too little.
- Asymmetric information — one side knows more (a used-car seller knows the faults; the buyer doesn't).
Practice
A firm with monopoly power can:
Monopoly power lets a firm restrict output and charge more, wasting resources.
Practice
Asymmetric information means:
When one party knows more (e.g. a used-car seller), deals can be unfair or inefficient.
You've got it
Key idea
- public goods fail completely (free-rider problem); merit under-consumed, demerit over-consumed
- monopoly power → higher price, lower output
- asymmetric information = one side knows more, leading to bad deals