(1) Chapter 5 - The Market Mechanism, Market Failure and Government Intervention in Market Flashcards
What are the 4 functions of price
- Signalling function
- Incentive function
- Rationing function
- Allocative function
Define SIGNALLING FUNCTION OF PRICES
Prices provide information to buyers and sellers
Define INCENTIVE FUNCTION OF PRICES
Prices create incentives for economic behaviour (higher prices encourage firms to supply more)
Define RATIONING FUNCTION OF PRICES
Rising prices exclude demand for a product
Define ALLOCATIVE FUNCTION OF PRICES
Allocating scarce resources away from markets showing excess supply and into markets where there is excess demand
Define MARKET FAILURE
Misallocation of of resources in the economy, either completely failing to provide a good/service or providing the wrong quantity
Define MISSING MARKET
Where there is no market because of the functions of prices have broken down
Define a PRIVATE GOOD (+ an example)
A good that is excludable and rival (an orange)
Define a PUBLIC GOOD (+ an example)
A good that is non-excludable and non-rival (a radio programme)
What two defining characteristics do PRIVATE GOODS possess?
- Private property rights: preventing other people from using the good
- Rivalry: when one consumes the good it cannot be consumed by another
Define a QUASI-PUBLIC GOOD (+ an example)
A good that is not fully non-rival and/or where it is possible to exclude people from consuming it
What is an EXTERNALITY
A special type of public good which third parties receive it without an option
Define POSITIVE EXTERNALILTY
An externality when consumed/produced causes a benefit to a third party, the social benefit is greater than the private
Define NEGATIVE EXTERNALITY
An externality when consumed/produced causes a cost to a third party, the social cost is greater than the private
What is a PRODUCTION EXTERNALITY
An externality (positive or negative) generated during the production of the good/service