will fail to produce nonexcludable public goods or at least fail to produce them at a
The market will not produce nonexcludable public goods. The door then is opened
to government involvement in the production of these nonexcludable public goods.
Side note: A government-provided good is not the same as a nonexcludable public
good. In some instances, a government-provided good is a nonexcludable public
good, such as when the government furnishes national defense. However, the
government furnishes mail delivery and education, two goods that are also provided
privately and are excludable and thus not subject to free riding.
Nonexcludable Versus Nonrivalrous
A good can be rivalrous or nonrivalrous in consumption and still be produced in the
market. However, if a good is not excludable the market will not produce it.
17-5 ASYMMETRIC INFORMATION
In case of nonexcludable public goods, the market produces zero output.
Asymmetric information (possible cause for market failure) is information that
either the buyer or the seller in a market exchange has and that the other does not
have. In other words, some information is hidden.
Ex. The seller of a house may have information about the house that the buyer does
not have, such as that the roof leaks during heavy rainfall.
The quantity consumed of a good is likely to be higher when there is asymmetric
information than if there is symmetric information.
Asymmetric Information in a Product Market
The demand curve represents marginal private benefits (MPB) and the supply curve
represents marginal private costs (MPC).
Is There Market Failure?
Certainly, the output level of a good and the quantity of labor were lower with
symmetric information than with asymmetric information.
The presence of asymmetric information does not guarantee that the market fails.
What matters is that the asymmetric information brings about a different outcome