1.5 Flashcards
what is market failure?
when the market is unable to efficiently allocate scarce resources to meet the needs of society
when will there be allocative inefficiency?
always in practice and it’s the government’s role to eliminate market failure by intervening
what are externalities?
the costs and benefits to a third party created by economic agents when undertaking their activities
what are externalities thought of as?
spill over effects due to production and consumption they can lie outside of the market price and cause market failure
What are negative externalities?
costs to a third party not included in the economic activity eg pollution
what are positive externalities?
benefits to a third party not included in the economic activity eg vaccines
what are private benefits/costs
the spill over costs/benefits to firms or individuals of an economic transaction
what are external benefits/costs?
the spill over costs/benefits to third parties of an economic transaction
what is dead weight welfare loss?
total change in social welfare due to an externality
what do production externalities impact?
the supply curve
what do consumption externalities impact?
the demand curve
what is the social optimum?
best option for society
what is MPB
MSB
MPC
MSC
Marginal Private Benefit
Marginal Social Benefit
Marginal Private Cost
Marginal Social Cost
give an eg of negative production externality
pollution from a factory
give an eg of a negative consumption externality
smoking and drinking
give an eg of a positive production externality
in work training and R&D
what is a demerit and merit good?
good/bad products provided both privately and publically
what does the government intervene to address?
allocative inefficiency through taxing and subsidising externalities
what are the 2 types of economies?
command and mixed
what is a command economy?
only the public sector is used for provision eg North Korea
what is a mixed economy?
public and private sectors for decisions eg UK
what are the 4 methods of government intervention?
regulation
legislation
indirect taxation/excise duty
education and advertising
what is regulation?
applying rules to firms/organisations by government/trade associations stopping consumers being exploited through false advertising
what is legislation?
harmful products being banned by law and policies implemented eg vape ban
what are the positives and negatives of legislation?
+ clear standards and known consequences
- difficult to enforce and penalties not deterring
what is indirect taxation/excise duty?
an inland tax on the sale or production of specific goods usually demerit
what is education and advertising?
educating consumers about what they can do helping them be savvy and protect themselves alongside other methods
when does government failure occur?
when a policy intervention leads to a deepening of a market failure or even worse a new failure may arise
what are the 4 types of government failure?
distortion of price signals
excessive admin costs
information failures
unintended consequences
what is distortion of price signals?
when the government creates incentives to influence the behaviour of firms/individuals
what do distortion of price signals create?
markets that wouldn’t survive without government support which distorts the free working of the market leading to distorted prices
what can distorted prices mean for the government?
they end up creating inefficiencies rather than correcting them eg minimum prices signalling to producers to supply more
what are excessive admin costs as a cause of government failure?
admin costs can mean that the benefits are outweighed by the costs, this can occur as government bureaucracy leads to higher costs
what are information failures as a cause of government failure?
provision of information ensures that economic units can maximise decisions when consuming and producing goods and services. However information used by the government can be inaccurate due to poor research or an inability to predict the future. This delivers the wrong signals to markets meaning decision making is flawed
what are unintended consequences as a cause of government failure?
policy interventions have effects that are unanticipated or unintended eg targets for treating patients leading to a reduction in the quality of care and therefore more deaths
