1.5 Market failure and govt intervention Flashcards
What is market failure?
It exists when the market does not allocate resources in the most efficient way.
What does non-rival mean?
If one person consumes a good, it does not prevent another person from consuming it.
What does non-excludable mean?
Once a good is provided, then it is impossible to stop people from using it, even if they haven’t paid.
What is a public good?
Something that is not provided by businesses in a free market because they would not be able to charge people effectively to use them.
What is a merit good?
One that we tend to under-consume because we don’t realise how good it is for us.
What is a demerit good?
One that we tend to over-consume because we don’t realise how bad it is for us.
How is alcohol a demerit good and how is consumption limited?
DG= Overconsumed and causes health problems
Puts pressure on scarce goods - like the NHS
Increased rates of violent crime under influence
CL = Age restrictions placed
Highly taxed good (70-80%)
Adverts
Alcohol free areas
Alcohol licenses
Scotland - min. prices
How are fatty foods a demerit good and how is consumption limited?
DG= Unhealthy
Overconsumed
Put pressure on healthcare services
CL= Adverts not shown before a certain time
Health service + school educate about healthy diets
Private costs
For producer of a good or service include the costs the firm pays in order to produce that good or service
For consumer= involves giving up some income in order to consuem that product
Private benefits
For producer of good or service include the profits made and the fulfillment of entrepreneurial and business objectives
For consumer is satisfaction guaranteed and gained by consumi ng goods and services that satisfy needs and wants
Private costs of car
Price of car and depreciation
Running costs
Tax
Insurance
Private benefits of car
Independence
Convenience
Access to work
Access to leisure
External costs of car
Pollution may cause illness
Congestion increases costs of transportation
Accidnets may happen
Impact of infrastructure
External costs
Costs or negative side-effects imposed on 3rd party who is neither the producer or consumer
External benefits
Benefits or positive side-effects that benefit a third party who is neither the producer nor the consumer
Externalities
Positive or negative effects on third parties
Social costs
The total costs of producing goods and services and are calculated by adding together the private and external costs
Social benefits
The total benefits of producing goods and services and are calculated by adding together the private and external benefits
Positive externalities
External benefits experienced by third parties but paid for by someone else
Negative externalities
External costs that have a detrimental effect on the lives of people who neither bought nor sold the produc
Markets working well
When social costs are equal in value to social benefits
Resources needed to produce what we consume match the value of the goods and services we choose
Purpose of governmant intervention
Reducing the impact of external costs such as pollution and greenhouse gases
Ensuring that potentially under-produced products are available to all, as with health-care and education
Ensuring that over-consumed products such as tobacco, drugs, alcohol and carbon-emitting products are discouraged or prevented
Reducing the impact of anti-competitive business behaviour
Regulation
legal and other rules that apply to organisations
Govts, EU and trade blocs make rules that enforce standards across whole industries
Legislation
Passing new laws to restrict activities that create negative externalities and over-consumption
Indirect taxation
Can increase the proce of products that are over-produced, making them more expensive to consume, making demand elastic
Grants and subsidies
Make under-consumed products cheaper and encourage increased consumption
Voluntary agreements
Work well when there is widespread agreement on the need for change
Advantages of legislation
Expected standards are clear
Failure to comply has consequences
The consequences are known
Disadvantages of legislation
The law may be diffficult to enforce
Enforcement can be expensive
Penalties may not deter behaviour
Describe regulation
Regulation may take the form of a quota or, more commonly, setting minimum standards for environmental emissions
Regulatory emissions inspecta nd prosecute businesses that fail to comply - can be difficult and costly to enforce
Polluter Pays Principle
Holds that the price of a product that pollutes should reflect both the private costs of production and the external costs - full social cost
Internalising the externality
Incentive
Any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives
Imposition of tax
Shifts the supply curve vertically upwards by the amount of the tax
The impact of higher price will depend on price elasticity of demand
Subsidies
Grants and subsidies are used to increase the consumption of under-consumed
Govt subsidise things like solar panels to make them cheaper and encourage more consumers to buy them
Grants used to pay for things like facilities such as swimming pools
Voluntary agreements
Govt can try to persuade businesses within a specific industry to change way they behave and adopt common codes of practice that reduce harmful externalities
Danger=not all businesses will sign up
Education
Changes in consumer behaviour can be brought about by either direct education in schools or campaigns to raise awareness
Free provision
Eg: rehabilitation facilities - minimise negative externalities
Free condoms and contraception to reduce pop growth and STDs
Advertising
Eg: Reduce drink driving
Campaigns designed to change behaviour and reduce negative externalities
Causes of govt failure
Do not always have enough information to make good decisions - some solutios have unintended conses that worsen position - even if og issue solved
Popular policies over technically efficient solutions
Some govt deps and other bodies do not move fast enough to solve worst problem
Distortion of price signals
Subsidies for insulating homes - extra money attracts soem contractors who do not always finish job efficiently
Incentive did not work efficiently
Unintended consequences
Hard to predict in advance
Eg: raising minimum wage - higher wages reduce business recruitment - more unemployment
Excessive administrative costs
May be cheaper to pollute and pay fines than cleaning up production process
