2014 A level H2 Economics Review: Microeconomics Qn 35 min read

There is considerable agreement over the need for government to provide public goods. There is less agreement over the extent to which markets fail because of imperfect information.

a) Explain why markets fail in case of public goods and where information is imperfect. [10m]

b) Evaluate alternative policies that are adopted by the Singapore government to correct for these types of market failure. [15m]

At first glance, this seems like a relatively straightforward and standard market failure question, with part (a) asking about the how public goods and imperfect information result in market failure and part (b) asking for evaluation of policies. Most students should be comfortable with the content and should be scoring around high L2 or low L3 for essays similar to this. However, this question is slightly tricky as it has suggested the approach that you should adopt and an area of focus. Don’t worry if you did not notice this, you can probably still do well if you provide the standard answer. Hey, but why stop at average? I will assume that you already know the foundational content knowledge required for this question, so I will be focusing more on the possible pitfalls in this question, and ways to improve your essay to achieve high L3.

Mistake 1: Students make imperfect information sound like externalities.

Imperfect information is not the same as externalities. Imperfect information was breezed through by my lecturers and tutors back in Junior College and the differences between imperfect information and externalities were not explicitly mentioned. So here’s the difference between the two: externalities are spillover effects to the third parties who are not directly involved in the consumption or production of the goods and services; imperfect information is when the individual agents are unaware or are misinformed of the full private cost or benefit of producing or consuming the goods and services. From the definitions we can see that market failure caused by imperfect information is internalised by the agents, while externalities affect parties who are not directly involved in the consumption or production of the goods and services.

Let’s apply it to an example. In the case of vaccination, there is both imperfect information and externalities. People may underestimate the chance of them catching a flu or a deadly virus and thus will underconsume vaccination — a case of imperfect information. In the externality case: vaccination will reduce illnesses and missed worked days. This confers benefits to firms and the economy at large (all of whom are agents not directly involved in the consumption of the vaccination). Thus we see that the two are distinct concepts.

Mistake 2: Not referring to the preamble.

Remember this: everything on the paper is there for a purpose — it will have some form of link to the question. It can provide points for the essay or suggest an angle that the examiners will want you to approach the question from. Here, it is slightly more subtle. If you read the second sentence carefully, you will get the idea that imperfect information can cause either complete or partial market failure. Most examples raised in schools are partial market failure. The market will still function, but only not at the socially optimal level. An example of complete market failure caused by imperfect information will be in the case of lemon goods. Some schools have taught this. In short, it is where information asymmetry results in buyers being unable to distinguish the better quality goods from the poorer quality ones. As such, the price of the good will fall below the reservation prices of sellers of the good quality goods. This will cause these sellers to withdraw their goods from the market, leaving only “lemons” for sale. In many cases, this will cause trading to cease completely — complete market failure.

Mistake 3: Skipping the word “alternative”.

This is an important word that most people will miss, even I am guilty of missing such words under stressful conditions. Now refer back to preamble and see what policy the question has provided. Yes — complete and direct provision. In the preamble, it has already mentioned direct and complete government provision of the goods and services, so the essay has to suggest others.

At this point, you may have realised that this question is not as easy as it seems. What other policies can be adopted to deal with public goods? There aren’t many alternative policies to begin with — it’s usually just government provision. Here’s one alternative policy that I thought of to deal with public good: conduct research to turn it into a semi-quasi (hybrid) good. With advancement of technology, it can be possible to exclude users from using certain ‘public’ goods and services. This can incentivise firms to provide them as the free-ridership problem is overcome. For instance, the ERP has made it possible to eliminate the free-ridership problem associated with roads. If taken a step further, provision of roads can be privatised. If you have any great ideas, feel free to share them with us under the ask anything section and we can help you develop it further.

Mistake 4: Failure to give contextualised examples.

As mentioned previously, this question is placed in the context of Singapore, hence the examiner will expect you to quote specific examples and schemes implemented by the government to secure a higher grade. You can still score well if you don’t give specific examples of the policies implemented by Singapore, but just note that you will be at a slight disadvantage if most of your peers are able to provide such examples in the essays. Some of the ways Singapore resolves imperfect information include providing avenues to help individuals look for their ideal job, having thorough background checks when applying for loans, and equipping students in school with discretionary skills. This will lower the information asymmetry and reduce frictional unemployment, which arises due to imperfect information.

Read the questions carefully.

Some A level question are like this. They look deceptively easy, but can be rather challenging. For those who have yet to take their A level papers, remember to read the questions carefully and make sure that you are answering the question and within the context set by the question.

So here’s a tip: You can do what I do by looking back at the question to check that you have not steered away from the question after every 2 paragraphs.

Follow econoception as we will be providing essay reviews for the other 2014 A level questions.

Till next time, dream economics.

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