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Microeconomics Main > 05 Market Failure: The 6 Market Failures - monopolies, externalities, merit and de-merit goods > Flashcards

05 Market Failure: The 6 Market Failures - monopolies, externalities, merit and de-merit goods Flashcards

1
Q

Define barriers to entry (B2E).

A

Factors that prevent firms from entering a market profitably.

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2
Q

What is the B2E acronym?

A

LTSB

  • Legal
  • Technical
  • Strategic
  • Brand Loyalty
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3
Q

What are the legal barriers to entry, for a new firm?

A

1 - Patents - sole ownership
2- Licences/permits - expensive, and difficult to obtain
3 - Red Tape - excessive paper work
4 - Standards and regulations - health and safety, environmental, pollution, minimum wages
5 - Insurance

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4
Q

What are the technical barriers to entry, for a new firm?

A
  • High start up costs
  • Sunk costs - can’t be recovered when a firm leaves the market - e.g., advertising, specialist machinery
  • Economies of scale - firm growth leads to lower average costs - difficult for new firms to enter the market
  • Natural monopoly - new firm driven out very easily
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5
Q

What are the strategic barriers to entry, for a new firm?

A

1 - Predatory pricing - pricing lower on purpose to drive out competition
2 - Limit pricing
3 - Heavy advertising

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6
Q

What are the economic benefits of monopoly power?

A
  • Research and development and dynamic efficiency
  • Economies of Scale - firms could charge a lower price
  • International competition - imports and exports
  • Regulation (competition and markets) - can’t always make decisions that will not benefit the consumer
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7
Q

Define Private Costs.

A

A direct cost to a producer or consumer - these costs are taken into account by the price mechanism.

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8
Q

Define Private Benefits.

A

A direct benefit to a producer or consumer - these benefits are taken into account by the price mechanism.

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9
Q

When consumers, firms and government (or economic agents) make decisions they will consider…

A

the private costs and benefits.

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10
Q

The free market equilibrium is where…

A

Private costs = private benefits

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11
Q

Define external costs.

A

AKA negative externalities - negative effects on third-parties (not the producer or consumer) - ignored by the price mechanism.

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12
Q

Define external benefits.

A

AKA positive externalities - positive effects on third-parties (not the producer or consumer) - ignored by the price mechanism.

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13
Q

A smoker may ignore external costs, such as…

A
  • The impact of those around them in terms of health
  • Risk of fire
  • A rise in taxes to fund the NHS due to more cancer patients
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14
Q

The private healthcare patient may ignore the external benefits, such as…

A
  • Increasing life expectancy and therefore working longer
  • Less strain on the NHS
  • Productivity gains
  • More enterprise out of a more wealthy population
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15
Q

Define social costs.

A

Private cost + external cost

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16
Q

Define social benefits.

A

Private benefit + external benefit

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17
Q

What are the private costs and benefits of higher education?

A 
PC = cost of degree - £9,000 per annum, opportunity cost (of working)
PB = increased future income, making friends
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18
Q

What are the external costs and benefits of higher education?

A 
EC = some people can't afford it
EB = more skill and flexible workforce
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19
Q

Why is higher education a market failure?

A

In a free market, higher education would be under consumed.

20
Q

What are the private costs and benefits of cigarette consumption?

A 
PC = Lung cancer
PB = Pleasurable
21
Q

What are the external costs and benefits of cigarette consumption?

A

EC = Passive smoking, high healthcare costs, fall in productivity and size of the workforce

22
Q

Why is cigarette consumption a market fialure?

A

Over-consumed in a free market - it’s a de-merit good. Taxes not high due to not much government intervention.

23
Q

Define diminishing marginal utility?

A

If the consumption of a good or service increases, the satisfaction derived gradually increases but at a decreasing rate, to the point where it reaches zero. Total satisfaction is maximised when marginal utility is zero.

24
Q

On a diagram marginal private benefit is…

A

downward slopping - the more extra units consumed, the lower the benefit.

25
Q

On a diagram marginal private costs is…

A

upward slopping - the more extra units that are produced, the higher the cost.

26
Q

Free market equilibrium is where…

A

MPC = MPB

27
Q

The free market is when (in diagram terms)…

A

when MPC = MPB

28
Q

The socially optimum market is where (on a diagram)…

A

MSC = MSB - no production externality

29
Q

The weight loss triangle will always point to the…

A

socially optimum equilibrium

30
Q

The socially optimum equilibrium can be defined as…

A

where society (and economists) want the market equilibrium to be.

31
Q

Define welfare loss.

A

The excess of social cost above social benefit for a given quantity (social cost > social benefit).

32
Q

Define welfare gain.

A

Social benefit > Social cost.

33
Q

Production externalities relate to a divergence between…

A

the MPC and the MSC.

34
Q

Consumption externalities relate to a divergence between…

A

the MPB and MSB.

35
Q

Define the Tragedy of the Commons.

A

Where a lack of property rights (ownership) leads to negative productive externalities - governments do not own areas, such as sea, forests, etc. Therefore, there could be a misallocation of resources due to no regulation - over exploited resources - is a an environmental market failure.

36
Q

One of reasons for environmental market failure is…

A

lack of clearly defined property rights relating to environmental resources such as the oceans, forests or atmosphere.

37
Q

As a result of a lack of clearly defined property rights, firms or consumers don’t…

A

suffer any penalty for polluting the atmosphere, dumping waste in the oceans, or excessive deforestation - leads to overuse of these resources and the rapid depletion of non-renewable resources.

38
Q

Define merit goods.

A

Goods that are under-consumed in the free market and release positive consumption externalities.

39
Q

Define de-merit goods.

A

Goods that are over-consumed in the free market and release negative consumption externalities.

40
Q

Who provides merit goods?

A

Both the state and private sector.

41
Q

Why are merit goods under-consumed in a free market?

A

Imperfect information:

  • People are not aware of the potential private benefits to themselves from consumption, especially in the long term
  • People may not be able to afford the product
  • People may not take into account the external benefits to society
42
Q

Why are de-merit goods over-consumed in a free market?

A

Imperfect information:

  • People unaware of damage to their health arising from consumption
  • Goods are too cheap and so people can too easily afford them, or they are too accessible
  • Individuals do not take account of the wider external costs associated with their consumption
43
Q

What are examples of merit goods?

A
  • Health care
  • Education
  • Exercise
44
Q

What are examples of de-merit goods?

A
  • Cigarettes
  • Alcohol
  • Gambling
45
Q

Note that not all products that result in positive or negative externalities in consumption are…

A

either merit or de-merit goods.

Microeconomics Main (41 decks)

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