1.5 Market failure and Government intervention Flashcards
What are private benefits and costs?
Advantages and disadvantages that individuals face, whether they’re borrower, seller or consumer. It only affects THEM.
What are external benefits and costs?
Advantages and disadvantages that individuals occur that affect OTHER PEOPLE. A.K.A. Positive and negative externalities.
What are the terms for private + external costs/benefits?
Social costs/benefits (these are the total costs)
What is the allocation of resources?
The way in which the factors of production are distributed within the economic system.
When does market failure occur?
Whenever social costs exceed social benefits. There are more negative externalities than positive.
How can failing to allocate resources properly cause market failure?
The resources are not being distributed in a way that makes consumers pay for the external costs what they buy is creating. Someone else is forced to pay for them.
Give an example of how cigarette costs cause market failure?
Cigarette price don’t accurately reflect the social costs and negative externalities they create to society, such as passive smoking and NHS costs.
If a free market is left alone how can it be beneficial to consumers?
The profit signalling mechanism helps guide where to allocate resources, this means that demand and supply shape the market and consumer’s needs are listened to.
if a free market is left alone how can it fail?
Over and under consumption of certain goods occurs and this can lead to lower standards of living for some as certain products prevail and others fall.
What is over and under consumption?
Over - Social costs exceed private costs. So, consumers pay a price that doesn’t include the negative externalities it creates. e.g. petrol - only pay the cost of the petrol not the cost of pollution to society.
Under - The price includes the whole social cost and so the demand for it isn’t very high as it’s usually expensive. E.g. education. This is bad because it reduces the social benefits it could’ve provided.
What 4 reasons might cause the government to intervene?
- To reduce the impact of external costs
- Ensure products that are under-consumed are available to all e.g. education
- Reduce the production of over-consumed goods e.g. drugs
- Reduce anti-competitive behaviour (predatory pricing)
What 5 ways might the government intervene?
- Regulation - standards
- Legislation - Laws
- Indirect taxation - On goods such as tobacco to increase the price to reflect the negative externalities they create and stop people buying them.
- Grant and Subsidies - To under consumed services such as schools or solar panel producers
- Voluntary agreements
What are the ads/disads of legislation as a government intervention strategy?
A - Clear standards, serious consequences
D - Expensive, still may not deter behaviour (sneaky ways of doing it instead)
What are the reasons for using regulation as a government intervention strategy?
It can give incentive to businesses to do the right thing and may give them a competitive advantage and good brand image if they comply.
How might voluntary agreements help reduce market failure?
The governments and companies recognise there needs to be a change and so work together to help reduce negative externalities. E.g. Food companies have agreed to reduce the amount of a saturated fats in their foods.
