OCR A Level Economics: Information failure, public goods and inequity (H460) – Revision Notes

These notes condense the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, topics Market power/Information asymmetries, Public goods and Inequity in Component 01, Microeconomics. The specification labels no content as AS or Extension. For the reasoning behind each point, read the study guide; then try the practice questions. Course pages: the OCR Economics hub and the checklist. To find weak areas first, try the free diagnostics. All figures are invented and illustrative.

Definitions to know word for word

Term	Definition
Information failure	Economic agents lack, or misjudge, the information needed for a good decision, so price signals mislead and resources are misallocated
Asymmetric information	Buyer and seller hold unequal knowledge about the good
Moral hazard	A change in behaviour after risk has been transferred, because the person no longer bears the full cost
Merit good	Under-consumed because consumers undervalue its benefits (or benefits spread beyond the user)
Demerit good	Over-consumed because consumers underestimate its harm or overestimate its benefit
Private good	Excludable and rival
Public good	Non-excludable and non-rival (non-diminishable), also non-rejectable, with zero marginal cost of an extra user
Quasi-public good	Has some public-good features, or has them only up to a point
Free rider	A user who gets the benefit while leaving the cost to others
Income	Money received per period
Wealth	Value of holdings on one date, less debts

Information failure and asymmetric information

Method in steps for any asymmetric information answer:

1. Say who knows more and about what.
2. Show how the less-informed side responds (pays an average price, charges an average premium).
3. Show who withdraws or who is harmed.
4. State the result: a smaller or missing market and a misallocation of resources.

Used-car type of reasoning: if buyers cannot tell good from poor, they pay for the average, so owners of good items leave and the market shrinks.

Moral hazard: a worked reminder

An insurer prices on a 2% chance of a £16,000 claim: expected claim = 0.02 × 16,000 = £320. After cover, careless behaviour lifts the chance to 3.5%: expected claim = 0.035 × 16,000 = £560. The rise is £240, which is 75% of the original. The insurer’s response may be higher premiums, or an excess so the insured still bears part of any loss. An excess of £500 on a £3,000 claim leaves the insured paying 500 ÷ 3,000 = 16.7%.

Diagram reminders: information failure

Name the axes (price/cost/benefit on the vertical, quantity on the horizontal), the curves (MPB, MSB, MC), and both equilibria.

Case	Curve positions	Result
Demerit good	MPB above MSB	Over-consumption; welfare loss to the right of the optimum
Merit good	MPB below MSB	Under-consumption; welfare loss to the left of the optimum

Merit good, worked. MPB = 10 − Q, MSB = 14 − Q, MC = Q + 2 (quantity in thousands, price in £).

• Market: 10 − Q = Q + 2, so Q = 4, price £6.
• Optimum: 14 − Q = Q + 2, so Q = 6, price £8.
• At Q = 4: MSB = 10, MC = 6, gap £4.
• Welfare loss = ½ × (6 − 4) × 4 × 1,000 = £4,000.
• Gap between MSB and MPB is 14 − 10 = £4 at every quantity, which is the size of the per-unit benefit consumers ignore.

Demerit good, worked. MPB = 18 − Q, MSB = 12 − Q, MC = Q + 2 (quantity in hundreds, price in £).

• Market: 18 − Q = Q + 2, so Q = 8, price £10.
• Optimum: 12 − Q = Q + 2, so Q = 5, price £7.
• At Q = 8: MSB = 4, MC = 10, gap £6.
• Welfare loss = ½ × (8 − 5) × 6 × 100 = £900.

Merit and demerit goods: the information link

• Consumers may not know the long-term effects, may lack the knowledge to judge quality, or may be swayed by habit, advertising or addiction.
• Under-consumption can also come from low income, which information alone cannot fix.

Significance (evaluation chain):

1. The larger the gap between private and true social benefit, the larger the welfare loss.
2. Labelling a good merit or demerit is a value judgement that consumers are wrong.
3. Responses to the problem differ in how well they work, and that depends on whether consumers respond to information and on income.
4. Conclude: significant where the stakes are high and the evidence is clear.

Public goods

Feature	Meaning	Why it matters
Non-excludable	Cannot stop non-payers using it	Firms cannot charge
Non-diminishable / non-rival	One person’s use leaves the same for others	Extra users take nothing away
Non-rejectable	Cannot opt out	Everyone gets it, wanted or not
Zero marginal cost	Extra user costs nothing	Efficient price of use is zero

Classification test. Ask two questions: can people be excluded? Does one person’s use reduce another’s? Both “no” gives a public good, both “yes” a private good, and a mix a quasi-public good. Congestion can turn a quasi-public road towards a private good as it fills.

Free rider problem: a worked reminder

A coastal beacon costs £6,000. A group of 150 boat owners each values it at £50.

• Total benefit = 150 × 50 = £7,500; net benefit = 7,500 − 6,000 = £1,500, so it is worth building.
• Equal share = 6,000 ÷ 150 = £40, below the £50 valuation.
• If only 60 pay £40: 60 × 40 = £2,400, a shortfall of £3,600.
• Covering the cost from those 60 would need 6,000 ÷ 60 = £100 each, double their valuation, so they refuse.
• Average cost per user falls with more users: 6,000 ÷ 150 = £40, 6,000 ÷ 300 = £20. This links to zero marginal cost.

The market therefore fails to provide a good whose benefits exceed its cost. This is market failure through a missing market.

Government role: evaluation chain

For: tax funding removes free riding; use can be free; everyone benefits. Against: the government does not know valuations, so the right quantity is hard to find; money has opportunity cost; state delivery may be inefficient; some quasi-public goods can be charged for or run privately. Conclude with a judgement on this particular good.

Inequity

Income and wealth

Worked: assets £90,000, debts £35,000. Net wealth = £55,000. With income £22,000, wealth is 55,000 ÷ 22,000 = 2.5 times annual income.

Causes: quick list

Income inequality	Wealth inequality
Skills, education and productivity	Inheritance and gifts
Occupation and scarcity of labour	Saving from higher income
Unemployment and inactivity	Asset price rises (property, shares)
Discrimination	Compounding of returns
Ownership of assets	Income inequality passing into savings
Tax and benefit design	Differences in access to credit

Worked: saving £5,000 a year at 3% for 10 years gives about £57,319 from £50,000 paid in. A £250,000 house rising 4% gains £10,000.

Tax design and the gap

Pre-tax incomes £24,000 and £72,000 have a ratio of 3.0.

• A flat 20% tax leaves £19,200 and £57,600, still ratio 3.0.
• A progressive system taking 10% from the first and 30% from the second leaves £21,600 and £50,400, ratio about 2.3.

Access to resources

Reasons: income and wealth, location, information and networks, discrimination, borrowing limits. Example: rent of £3,600 is 30% of a £12,000 income but 6% of £60,000.

Significance chain: fairness (normative) → wasted talent and lower output → social costs → counter-argument (incentives, equality of opportunity versus outcome) → depends on scale and mobility.

Must-know distinctions

• Merit good versus public good: a merit good can be bought and sold in the market but is under-consumed; a public good cannot be sold profitably.
• Asymmetric information versus moral hazard: the first is unequal knowledge; the second is changed behaviour after cover.
• Non-excludable versus non-rival: one is about stopping access, the other about whether use reduces availability.
• Income versus wealth: flow versus stock.
• Equality of opportunity versus equality of outcome.

Quick self-test

1. Define asymmetric information.
2. An insurer assumes a 2% chance of a £16,000 claim. After cover, the chance rises to 3.5%. Find the rise in expected claim in pounds and as a percentage.
3. For a merit good with MPB = 10 − Q, MSB = 14 − Q and MC = Q + 2, find market quantity and price.
4. Find the quantity and price that are best for society.
5. Find the welfare loss if Q is in thousands and price in £.
6. Name the four characteristics of a public good.
7. A project costing £6,000 is used by 300 people. Find the average cost per user, and compare with 150 users.
8. Of 150 beneficiaries valuing a beacon at £50, 60 pay an equal share of £40. Find the shortfall against a £6,000 cost.
9. A household has assets of £90,000, debts of £35,000 and income of £22,000. Find net wealth as a multiple of income.
10. Rent of £3,600 falls on incomes of £12,000 and £60,000. Find the percentage share in each case.

Answers

1. The two sides of a deal do not have equal knowledge, so one is better informed.
2. Expected claim rises from £320 to £560, a rise of £240, or 75%.
3. 10 − Q = Q + 2, so Q = 4, price £6.
4. 14 − Q = Q + 2, so Q = 6, price £8.
5. ½ × 2 × 4 × 1,000 = £4,000.
6. Non-excludability, non-diminishability/non-rivalry, non-rejectability, zero marginal cost.
7. 6,000 ÷ 300 = £20; with 150 users it is £40.
8. 60 × 40 = £2,400, so the shortfall is £3,600.
9. 90,000 − 35,000 = £55,000; 55,000 ÷ 22,000 = 2.5.
10. 3,600 ÷ 12,000 = 30%; 3,600 ÷ 60,000 = 6%.

Where marks are usually lost

• Describing a merit good as “worthwhile” without saying buyers undervalue it and so consume too little.
• Drawing demand and marginal social benefit curves but not labelling both equilibria or the welfare loss.
• Mixing up which curve lies above the other for merit and for demerit goods.
• Giving only “non-excludable” for a public good and missing non-rivalry.
• Describing the free rider problem without saying why the market then fails to supply.
• Treating government provision as obviously right, with no evaluation of cost or knowledge.
• Confusing income with wealth.
• Listing causes of inequality with no link to the effect or no judgement of significance.
• Stating “inequality is unfair” as a fact when it is a value judgement.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, topics Market power/Information asymmetries, Public goods and Inequity.