05 Market Failure: The 6 Market Failures - public goods, labour immobility, inequality Flashcards
Define public goods.
Goods which are non-excludable and non-rival in consumption.
Define non-excludable.
Once provided, no person can be excluded from benefitting.
Define non-rival.
Consumption of the goods by one person doesn’t reduce the amount available for anorther person - no price can be changed for the good.
Define quasi-public goods.
Goods that show some characteristics of public goods and private goods.
Define the Free Rider Problem.
Difficulty charging people for benefitting once a product is available.
Once a public good is provided for one individual, is it…
automatically provided for all.
Why are public goods are market failure?
It is not possible for firms to withhold the good from consumers who refuse to pay. The rational consumer would wait for someone else to provide the good and then reap the rewards of consuming it for free.
- If left to the free market, public goods would not be provided at all due to a lack of profit motive
If everyone waits for others to supply the public good…
then it may never be provided.
The non-excludability characteristic of public goods means that…
the price mechanism cannot develop as free riders will not pay.
Give examples of a public good.
- Street lighting
- Police service
- Flood defences
- National parks
- The Army
Give examples of a quasi public good.
- Motorwars
- Tunnels
- Bridges
Define Labour immobility.
A market failure as labour is a scarce resource and immobile labour lacks productivity.
Define Structural Unemployment.
Long term unemployment that occurs due to a mismatch of skills that are supplied (by the worker) and demand ed (by firms).
If there is labour immobility then workers cannot…
move to their most productive use and there is a unemployement as a result.
Where will the economy be prodcuing on the PPF if there is labour immobility?
Inside the PPF.
Why is labour immobility a market failure?
There is an inefficient allocation of resources.
Define Geographical immobility.
Workers may be hesitant to move from one area to another to find work e.g., due to family and language barriers.
Define Occupational immobility.
Whilst the specific skills of the worker may no longer be needed, they may lack the skills demanded to find work.
What policies could be used to reduce unemployment caused by geographical immobility?
- Subsidise home building in areas where there are jobs
- Therefore people looking for work will benefit as house prices will be cheaper
- Maximum rental prices - would set a limit to the amount paid to live in rented property, giving families a guaruntee that prices will not increase
What policies could be used to reduce unemployment caused by occupational immobility?
- Re-training schemes/apprenticeship schemes
- Would decrease the requirements needed to find jobs, as people would have more skills; they will meet the demands needed from frims, looking to employ
- Subsidise higher education - would mean that university is more affordable, and a wider range of people have access to it
What are the factors affecting geographical immobility?
- Family
- Language barriers
- Ease at which you can move house
- Practicality
- Low amount of income - house prices differentials
- Attachment
- Availability of affordable renting
What are the factors affecting occupational immobility?
- Quality of education
- Transferable skills (organisation, communication, leadership, data)
- Can workers take time off to train?
- Is there affordable education training
Define Inequality.
The difference in income and wealth among groups in a population.
Define equality.
Equal chances in life for all, regardless of identity.
Define Equity.
Fairness.
Define Inequity
Unfairness.
In a free market an individuals ability to consume goods and services depends on…
their income or wealth
What is the main source of wealth in the UK?
Through inheritence - an unequal distribution of resources, which may be judged as unfair or inequitable.
What are the main causes of income inequality?
- Free market
- Fiscal policy
- Lower taxation
- Educational quality
- Skills and training
- Wealth (creates additional income)
- Unemployment
What are the main economic and social costs of income inequality?
- Lower wages for lower class families
- Fewer skills for people who had a lower quality of education
- Loss of ‘human capital’ (labour productivity)
- Poverty causes a fall in consumption
- Loss of allocative efficiency
- Crime
- Mental health implications
What policies could reduce inequality?
- Higher minimum wage
- Free provision of services
- Higher rates of income tax for top earners
- Subsidies for child care
How would increasing the NMW decrease Inequality?
An, Ev.
An:
- Government regulation, by puting the minimum wage in place
- Boosts work incentive
- It is a set guaranteed monetary value
Ev:
- Could cause unemployment, as there are higher firm costs
How would higher rates of income tax for top decrease inequality?
An, Ev.
An:
- Lowest earning (below £12,500) taxed 0%, earners who earn 12,501 to 50,000 taxed 20%
- People who earned 50,000 to 150,000 taxed 40%
- People who earn 150,001+ taxed 45% - COULD BE INCREASED TO 50%
Ev:
- It works, as it makes sure those lower earners are still able to pay bills, etc
- Risk of a brain drain and increased tax avoidance
Why is inequality a market failure?
- An unequal distribition of income and wealth is a misallocation of resources because the poor do not have equal access to merit goods (education, healthcare) as the rich
- There are external costs of inequality, for exaple homelessness, poverty and the consumption of demerit goods
