Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

IB Economics HL > 1.4 - Market failure > Flashcards

1.4 - Market failure Flashcards

1
Q

Define: market failure

A

The failure of the market to allocate resources efficiently. Resulting in allocative inefficiency and welfare losses.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Where is the most desirable point to be in a market? (for society)

A

At MSC=MSB

This is called the socially optimum point

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Define: externality

A

When the actions of consumers or producers give rise to negative or positive side-effects on third parties.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Define: positive externality

A

When the actions of individuals benefit third parties.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Define: negative externality

A

When the actions of individuals harm third parties

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Define: MPC

A

Marginal Private Costs

Costs to producers of producing one more unit of a good

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Define: MSC

A

Marginal Social Costs

The cost to society of producing one more unit of a good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Define: MPB

A

Marginal Private Benefit

The benefits to consumers of consuming one more unit of a good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Define: MSB

A

Marginal Social Benefits

The benefits to society of consuming one more unit of a good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Define: Negative externalities of production.

Examples?

A

The external costs to society created by producers of a good.

E.g. a cement factory emitting smoke into the air and dumping waste into the ocean

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How can you represent a negative externality of production diagrammatically?

A

MPC further right than MSC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How could you determine the welfare loss created by a negative externality of production?

A

The triangle above demand, between MSC and MPC.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

On a negative externality of production diagram, compare:

  • Market equilibrium consumer, producer and social surplus.
  • Social equilibrium consumer, producer and social surplus.
A

Market equilibrium:

CS: a + b + c + d | PS: f + g + h | SS: a + b + c + d +f + g + h - e

Social equilibrium:

CS: a | PS: b + f | SS: a + b + f

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are two general ways of dealing with externalities?

A
  • Government regulation (‘command’ approach)
  • Market-based policies
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How can the government use regulation limit the external costs created by a negative externality of production?

A
  • Limit the emission of pollutants - a legal maximum.
  • Limit the quantity of output by the polluting firm.
  • Require polluting firms to install technologies to reduce emissions.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How could the government use market-based policies to correct a negative externality of production?

Diagrams?

A
  • Impose a tax on the firm
  • Impose a tax on the pollutants produced
  • Set up a cap and trade system
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Why might a government use regulation to correct negative externalities?

—

Why shouldn’t they?

A

+ If the social costs are direct and serious, e.g. radioactive waste

+ Easier to implement and are fixed

+ Are almost certain to have the overall desired effect

—

  • They do not allow for the externality to be internalised
  • They do not provide incentives to change production practices, only quantity output.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Why might a government use market-based solutions to deal with a negative externality?

A

+ Internalises the cost

+ Encourages changes in practices, decreasing the aspect that creates the external cost

—

  • Rule-breakers may go unnoticed, or hard to detect
  • Political decisions on what is the right amount of intervention
  • May not have the desired effect or no effect at all.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Define: Negative externality of consumption

Examples?

A

The external cost to third parties created by consumers consuming a particular good.

E.g. partying with loud music through the night - disturbing neighbours. Consuming fossil fuels for petrol cars - causing pollution.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How can you represent a negative externality of consumption diagrammatically?

A

MPB above/further right than MSB

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

On a negative externality of consumption diagram, compare:

  • Market equilibrium consumer, producer and social surplus.
  • Social equilibrium consumer, producer and social surplus.
A

Market equilibrium:

CS: a + b | PS: c + d + f | SS: a + b + c + d + f - e

Social equilibrium:

CS: b + c | PS: f | SS: b + c + f

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Define: demerit goods

A

Demerit goods are goods that are considered to be undesirable for consumers but are overprovided by the market.

23
Q

How can a government deal with a negative externality of consumption?

Diagrams?

A
  • Government regulation on consumption
  • Advertisement and awareness campaigns
  • Market-based policies (tax on producers or tax on consumers)
24
Q

Define: Positive externalities of production

Examples?

A

The external benefits to third parties created by producers.

E.g. a pharmaceutical company develops a new drug that benefits not only its users but those around them with improved life expectancy and quality of life.

25
Q

How can a positive externality of production be shown diagrammatically?

A

MPC further left to MSC

26
Q

On a positive externality of production diagram, compare:

  • Market equilibrium consumer, producer and social surplus.
  • Social equilibrium consumer, producer and social surplus.
A

Market equilibrium:

CS: a | PS: b + e | SS: a + b + e - d - g

Social equilibrium:

CS: a + b + c + d | PS: e + f + g | SS: a + b + c + d + e + f + g

27
Q

How might a government correct a positive externality of production?

Diagrams?

A
  • Direct government provision
  • Granting subsidies
28
Q

Define: positive externality of consumption

Examples?

A

The external benefits to third parties created by consumers.

E.g. consumption of healthcare

29
Q

How can a positive externality of consumption be shown diagrammatically?

A

MPB further left than MSB

30
Q

On a positive externality of consumption diagram, compare:

  • Market equilibrium consumer, producer and social surplus.
  • Social equilibrium consumer, producer and social surplus.
A

Market equilibrium:

CS: b + d | PS: g | SS: b + d + g - c - f

Social equilibrium:

CS: a + b + c | PS: d + e + f + g | SS: a + b + c + d + e + f + g

31
Q

Define: merit goods

A

Goods that are held to be desirable for consumers, but which are underprovided by the market.

32
Q

Why might a merit good be underprovided?

(3)

A
  1. The good may have positive externalities
  2. Low levels of income and poverty
  3. Consumer ignorance.
33
Q

How might a government correct a positive externality of consumption?

Diagrams?

A
  • Legislation e.g. school leaving age
  • Advertising
  • Direct government provision
  • Subsidies
34
Q

What is a private good?

A

Goods that are rivalrous and excludable

35
Q

What is a public good?

A

Goods that are non-rivalrous and non-excludable

36
Q

What does rivalrous mean?

What does excludable mean?

A

Rivalrous: Its consumption by one person reduces its availability for someone else

Excludable: It is possible to exclude people from the good such as through price

37
Q

What are examples of pure public goods?

A
  • A lighthouse
  • A police force
  • National defence
  • Flood control
  • Non-toll roads
  • Fire protection
  • Basic research
  • Anti-poverty programmes
38
Q

How do public goods illustrate the free-rider problem?

A

As they are non-excludable, people can enjoy the good without paying for it.

39
Q

What are quasi-public goods?

Examples?

A

Goods that are non-rivalrous (like public goods) but are excludable (like private goods).

E.g. Entrance fees to public museums, toll roads.

40
Q

What are common access resources?

Examples?

A

Resources that are not owned by anyone, do not have a price and are available for everyone to use. They are rivalrous but non-excludable.

E.g. clean air, lakes, open seas, the stable climate

41
Q

What is sustainability?

A

Maintaining the ability od the environment and the economy to continue to produce and satisfy needs and wants into the future.

42
Q

How can a government respond to threats to sustainability?

A
  • Legislation
  • Carbon taxes
  • Research and promotion of green energy
43
Q

Why might carbon taxes be better than cap and trade schemes?

A
  • Carbons taxes make energy prices more predictable.
  • Carbon taxes are easier to design and implement.
  • Carbon taxes can be applied to all users of fossil fuels.
  • Carbon taxes do not offer opportunities for manipulation by governments or interest groups.
  • Carbon taxes do not require as much monitoring for enforcement.
  • Cap and trade face political pressures to set an appropriate cap
  • Carbon taxes can restrict competition between firms.
44
Q

Why might cap and trade schemes be better than carbon taxes?

A
  • Carbon taxes may be too low
  • Carbon taxes cannot target a particular level of carbon reduction
  • Carbon taxes are regressive
  • Carbon taxes must be adjusted for inflation
45
Q

What steps can governments take for climate change mitigation?

A
  • Encouragement and investment into green R&D
  • International cooperation
  • Adopting Green GDP
46
Q

What is asymmetric information?

What are information gaps?

A

Asymmetric information: A situation where buyers and sellers do not have equal access to information

Information gaps: When neither the buyers nor sellers have information.

47
Q

What are possible government responses to asymmetric information?

A
  • Regulation
  • Licensure
  • Provision of information
48
Q

What is moral hazard?

A

A situation where one party takes risks but does not face the full costs of those risks.

49
Q

What is monopoly power/market power?

A

The ability of a firm or group of firms to control the price of the product they sell.

Can occur in monopolies and oligopolies.

50
Q

What steps can a government take against monopoly power?

A
  • Anti-monopoly legislation
  • Regulation
  • Nationalisation
  • Trade liberalisation
51
Q

What are all 10 market failures?

What misallocation do they correspond to?

A
  1. Negative production externality (overallocation)
  2. Negative consumption externality (overallocation)
  3. Positive production externality (underallocation)
  4. Positive consumption externality (underallocation)
  5. Merit goods (underallocation)
  6. Demerit goods (overallocation)
  7. Public goods (underallocation)
  8. Overuse of common access resources (overallocation)
  9. Asymmetric information (underallocation)
  10. Monopoly power (underallocation)
52
Q

What are all 7 government failures?

A
  1. Political self-interest
  2. Poor value for money - inefficient
  3. Policy short-termism
  4. Regulatory capture
  5. Conflicting objectives
  6. Bureaucracy and red tape
  7. Unintended consequences
53
Q

What is regulatory capture?

A

When a government agency operates in favour of producers.

E.g. Lobbying

IB Economics HL (15 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions