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Economics - Micro > 1:3:1 - Market Failure > Flashcards

1:3:1 - Market Failure Flashcards

1
Q

What is Market Failure?

A

When the price mechanism causes an inefficient allocation of resources, leading to a net welfare loss.

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2
Q

What happens to the allocation of resources when there is Market Failure?

A

They are not allocated to their optimum use.

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3
Q

What are External Costs?

A

Negative third-party effects outside of a market transaction. E.g - Pollution

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4
Q

What are Externalities?

A

Are those costs or benefits which are external to an exchange, they are third-party effects ignored by the price mechanism

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5
Q

What are Externalities also known as?

A
  • Indirect Costs / Benefits - Spillovers from Production
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6
Q

External costs are [………..] externalities

A

Negative

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7
Q

External benefits are […………] externalities.

A

Positive

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8
Q

When may external costs occur?

A

In the production and the consumption of a good or service

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9
Q

Example of external costs of Production.

A
  • Company polluting the river - External cost to fishers and water supply companies - fish catches are reduced and water is more expensive to purify
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10
Q

Example of an External Cost in Consumption.

A

Is a person smoking tobacco and polluting the air.

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11
Q

What are Private Costs?

A

Costs which are internal to a business, which are taken into account by the price mechanism.

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12
Q

In a free market who is only concerned about private costs of production?

A

Producers

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13
Q

Examples of Private Costs to a Producer?

A
  • Wages for workers - Rent of buildings - payment for new raw materials
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14
Q

What are Social Costs?

A

The sum of external costs and private costs from a market transaction.

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15
Q

External costs is the difference between…

A

Private and social costs

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16
Q

The marginal private cost and marginal social cost curves [……….]

A

Diverge

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17
Q

Because the marginal Social costs and marginal Private costs diverge what does this mean?

A

External costs increase disproportionately with output.

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18
Q

In what instance could the Marginal Social Costs and the Marginal Private Costs be drawn parallel to each other?

A

If costs per unit of output remain constant

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19
Q

What are External Benefits?

A

Positive third-party effects outside of a market transaction.

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20
Q

When may external benefits occur?

A

In production and consumption

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21
Q

Example of External Benefits in production.

A
  • Recycling of waste materials - Helps promote renewable economic growth
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22
Q

Example of external Benefit in consumption.

A
  • Vaccination of an individual against various diseases - Reduces the possibility of other people catching a disease who come into contact
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23
Q

What are Private Benefits?

A

Benefits internal to a market transaction, which are therefore taken into account by the price mechanism.

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24
Q

In a free market, who is only concerned with private benefits or utility for consuming a good or service.

A

Private Benefits

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25
Q

What is the assumption which economists make when looking at Private Benefits?

A

Assume the utility gained from consuming a product can be put as a price.

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26
Q

Private Benefits may also refer to what?

A

Revenue a firm makes from selling a good

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27
Q

What is Social Benefits?

A

The sum of external benefits and private benefits from a market transaction.

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28
Q

External benefits are the difference between what?

A

Difference between private benefits and social benefits

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29
Q

For social benefits, the margins private benefits and the marginal social benefit curves often [……..]

A

Diverge

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30
Q

Social benefits, in what instance will marginal private benefit and marginal social benefit be drawn parallel to each other?

A

External benefit per unit consumed remains constant.

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31
Q

For market failure, the supply curve is also called the…

A

Marginal private cost curve (MPC)

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32
Q

The addition of the MPC curve forms the…

A

Firms the market supply curve.

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33
Q

In Market Failure, the Demand curve for consumers is called?

A

The Marginal Private Benefit (MPB)

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34
Q

When looking at consumers, what do economists assume?

A

Economists assume that it is possible to measure the benefit obtained from consuming a good by the price people are prepared to pay for it.

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35
Q

As an individual consumes more units of a good, the marginal utility (marginal benefit) will […….]

A

Fall

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36
Q

Why does the Demand curve slope downward from left to right?

A

Diminishing marginal utility

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37
Q

What is Market Equilibrium?

A

Where the marginal price benefit equals the marginal private cost

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38
Q

What is the Social Optimum?

A

Where marginal social benefit equals marginal social cost

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39
Q

What can the Marginal Social Cost also be called?

A

MSC

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40
Q

What can the Marginal Social Benefit be called?

A

MSB

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41
Q

What is maximised when the social optimum is reached in a market?

A

Welfare Maximisation

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42
Q

What does the free market ignore?

A

Negative / Positive Externalities

43
Q

What effect does External costs on the production of a good or service do to the supply curve?

A

Causes the supply curve to PIVOT left and become the Marginal Social Cost Curve

44
Q

What does adding external benefits on to the consumption of a good or service do to the demand curve?

A

Causes the demand curve to PIVOT to the right and become the Marginal Social Benefit Curve

45
Q

What are the impacts of external costs on consumers and producers?

A
  • Overproduction (Free Market Level of output exceeds the social optimum level of output) - Underpricing (Free Market Prices is below the social optimum price) - Welfare Loss (Marginal Social Costs excess marginal social benefits)
46
Q

What are the impacts of external benefits on consumers and producers?

A
  • Underproduction (Free Market Level of output is less than the social optimum level) - Underpricing (Free Market is below the social optimum price) - Personal Welfare gain (marginal social benefits exceed marginal social costs)
47
Q

What are Public Goods?

A

Those goods that have non-rivalry and non-excludability in their consumption.

48
Q

What is meant by a missing market?

A

When public goods are not included in the market.

49
Q

How are Public goods consumed?

A

Collectively

50
Q

What characteristics do Public goods demonstrate?

A
  • Non-excludability - Non-Rivalry
51
Q

What does non-excludability mean?

A

Means that once a good has been produced for the benefit of person, it is impossible for others from benefitting.

52
Q

What does non-rivalry mean?

A

Means that as more people consume a good and its benefits, it does not reduce the amount available for others.

53
Q

Once a Public good has been provided how much does it cost to supply that good to another person?

A

Extra consumer is 0

54
Q

What are Private Goods?

A

Those goods that have rivalry and excludability in their consumption.

55
Q

What is the relationship between public and private goods?

A

They are opposites.

56
Q

How do owners of private goods prevent other consumers from consuming the good?

A

Use private property rights

57
Q

Can private goods be rejected? And what does this mean?

A

Yes they can be rejected, which means one has a choice over whether to consume them or not.

58
Q

Why in a free market, are Public goods underprovided?

A

Due to the free rider problem

59
Q

What is the Free Rider Problem?

A

Once a Public good has been provided for one individual, it is automatically provided for all.

60
Q

Why does the free rider problem causes market failure?

A

Because it is not possible for the firms to withhold the good for those consumers who refuse to pay for it.

61
Q

What would a rational consumer do, in terms of the free rider problem?

A

A rational consumer would wait for someone else to provide the good and then reap the rewards by consuming it.

62
Q

What May happens if everyone waits for others to provide the Public good?

A

It may never be provided

63
Q

What effect does non-excludability have on the price mechanism?

A

The price mechanism cannot develop as free riders will not pay

64
Q

Why don’t Firms Supply Public Goods?

A

Because it is difficult to gain profits from it

65
Q

Who provide public goods?

A

The government, and fund them from general taxation.

66
Q

What are Information gaps?

A

Where consumers, producers or the he government have insufficient knowledge to make rational economic decisions.

67
Q

How do Information Gaps lead to market failure?

A
  • Because consumers or producers have more market knowledge than others about a particular good or service. - Means there is an unequal balance upon which to conduct economic transaction between them. • when consumers and producers lack basic knowledge about the good and end up making non-rational economic decisions.
68
Q

What is Symmetric Information?

A

Where consumers and producers have access to the same information about a good or service in the market.

69
Q

In competitive markets it is assumed that consumers have […………..] Information

A

Symmetric

70
Q

Assuming that consumers and producers act in a rational way, what happens to resources?

A

Resources are all allocated efficiently

71
Q

What does symmetric Information mean for consumers looking to buy on the market?

A

Consumers will buy a good or service from a producer offering the best deal, taking into account things like price, quality, reliability and after-sales service

72
Q

What is Asymmetric Information?

A

Where consumers and producers have unequal access to information about a good or service in the market

73
Q

What is more realistic Asymmetric or Symmetric Information?

A

Asymmetric

74
Q

What affect does Asymmetric Information have on the allocation of resources?

A

Leads to the misallocation of resources

75
Q

How does imperfect market knowledge lead to a misallocation of resources?

A
  • Producer knowledge may exceed consumer knowledge (Consumer could be paying too much for a poor quality good, losers are the consumer) - Consumer knowledge may exceed producer knowledge (eg, insurance companies consumers may put in incorrect details to get a better rate)
76
Q

What do External Costs and Benefits arise due to?

A

Third-party effects in the market transaction that the price mechanism ignores.

77
Q

External costs in production lead to…

A

A Welfare Loss triangle as the free market output equilibrium is then the social optimum position.

78
Q

External Benefits in consumption lead to a…

A

Potential Welfare gain triangle as the free market output equilibrium is less than the social optimum position.

79
Q

Public goods display characteristics of….

A

Non-Rivalry and Non-Excludability in consumption

80
Q

Public goods are underprovided or not provided at all in a free market economy due to what?

A

The free-rider problem

81
Q

Information gaps mean consumers and producers may make economic decisions on buying and selling goods which…

A
  • Reduction in their welfare - Underconsumption of merit goods, overconsumption of demerit Goods
82
Q

Symmetric Information is where…

A

Consumers and producers have equal access to market knowledge.

83
Q

Asymmetric Information is where…

A

Consumers and producers have unequal access to market knowledge

84
Q

Diagram showing a producer and consumer surplus.

A
85
Q

Graph showing consumer surplus with inelastic demand.

A

If demand is price inelastic, then there is a bigger gap between the price consumers are willing to pay and the price they actually pay.

86
Q
A
87
Q

Where is the consumer surplus area?

A

Consumer surplus is the area between the demand curve and the market price.

88
Q

If the demand curve is inelastic what happens to the consumer surplus area?

A

It is bigger

89
Q
A
90
Q

How are monopolies able to influence consumer surplus?

A

Can reduce consumer surplus by setting higher prices

91
Q

On this diagram what does the demand curve illustrate?

A

illustrates the marginal utility a consumer gets from consuming a product

92
Q

Find the consumer surplus in this graph.

A

At quantity 500 litres, the marginal utility is £0.80 – which indicates the marginal utility is 80p. However, with a price of 50p, the consumer surplus is the difference.

93
Q

What is the Producer Surplus?

A

difference between the price a firm receives and the price it would be willing to sell it at.

94
Q

Where is the Producer Surplus on a Graph?

A

Difference between the supply curve and the market price.

95
Q

How free trade affects consumer and producer surplus?

A

Free trade means a reduction in tariffs. It leads to lower prices for consumers and an increase in consumer surplus.

96
Q

Diagram showing Inelastic and Elastic Supply.

A
97
Q

What is Inelastic Supply?

A

a change in price causes a smaller proportional change in quantity supply

98
Q

What is Elastic Supply?

A

a change in price causes a bigger proportional change in supply

99
Q
A
100
Q

Diagram showing Inelastic Supply and Perfectly Inelastic Supply.

A
101
Q

Reasons for supply being inelastic?

A

Firms operating close to full capacity.

Firms have low levels of stocks, therefore there are no surplus goods to sell.

In the short term, capital is fixed in the short run e.g. firms do not have time to build a bigger factory.

102
Q

Diagram showing Elastic Supply and Perfectly Elastic Supply.

A
103
Q

Reasons for supply being elastic?

A

f there is spare capacity in the factory.

If there are stocks available.

In the long run, supply will be more elastic because capital can be varied.

104
Q
A

Economics - Micro (32 decks)

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