1.5 Market failure and govt intervention

Question 1

What is market failure?

Answer 1

It exists when the market does not allocate resources in the most efficient way.

Question 2

What does non-rival mean?

Answer 2

If one person consumes a good, it does not prevent another person from consuming it.

Question 3

What does non-excludable mean?

Answer 3

Once a good is provided, then it is impossible to stop people from using it, even if they haven’t paid.

Question 4

What is a public good?

Answer 4

Something that is not provided by businesses in a free market because they would not be able to charge people effectively to use them.

Question 5

What is a merit good?

Answer 5

One that we tend to under-consume because we don’t realise how good it is for us.

Question 6

What is a demerit good?

Answer 6

One that we tend to over-consume because we don’t realise how bad it is for us.

Question 7

How is alcohol a demerit good and how is consumption limited?

Answer 7

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

Question 8

How are fatty foods a demerit good and how is consumption limited?

Answer 8

DG= Unhealthy
Overconsumed
Put pressure on healthcare services
CL= Adverts not shown before a certain time
Health service + school educate about healthy diets

Question 9

Private costs

Answer 9

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

Question 10

Private benefits

Answer 10

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

Question 11

Private costs of car

Answer 11

Price of car and depreciation
Running costs
Tax
Insurance

Question 12

Private benefits of car

Answer 12

Independence
Convenience
Access to work
Access to leisure

Question 13

External costs of car

Answer 13

Pollution may cause illness
Congestion increases costs of transportation
Accidnets may happen
Impact of infrastructure

Question 14

External costs

Answer 14

Costs or negative side-effects imposed on 3rd party who is neither the producer or consumer

Question 15

External benefits

Answer 15

Benefits or positive side-effects that benefit a third party who is neither the producer nor the consumer

Question 16

Externalities

Answer 16

Positive or negative effects on third parties

Question 17

Social costs

Answer 17

The total costs of producing goods and services and are calculated by adding together the private and external costs

Question 18

Social benefits

Answer 18

The total benefits of producing goods and services and are calculated by adding together the private and external benefits

Question 19

Positive externalities

Answer 19

External benefits experienced by third parties but paid for by someone else

Question 20

Negative externalities

Answer 20

External costs that have a detrimental effect on the lives of people who neither bought nor sold the produc

Question 21

Markets working well

Answer 21

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

Question 22

Purpose of governmant intervention

Answer 22

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

Question 23

Regulation

Answer 23

legal and other rules that apply to organisations
Govts, EU and trade blocs make rules that enforce standards across whole industries

Question 24

Legislation

Answer 24

Passing new laws to restrict activities that create negative externalities and over-consumption

Question 25

Indirect taxation

Answer 25

Can increase the proce of products that are over-produced, making them more expensive to consume, making demand elastic

Question 26

Grants and subsidies

Answer 26

Make under-consumed products cheaper and encourage increased consumption

Question 27

Voluntary agreements

Answer 27

Work well when there is widespread agreement on the need for change

Question 28

Advantages of legislation

Answer 28

Expected standards are clear
Failure to comply has consequences
The consequences are known

Question 29

Disadvantages of legislation

Answer 29

The law may be diffficult to enforce
Enforcement can be expensive
Penalties may not deter behaviour

Question 30

Describe regulation

Answer 30

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

Question 31

Polluter Pays Principle

Answer 31

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

Question 32

Incentive

Answer 32

Any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives

Question 33

Imposition of tax

Answer 33

Shifts the supply curve vertically upwards by the amount of the tax
The impact of higher price will depend on price elasticity of demand

Question 34

Subsidies

Answer 34

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

Question 35

Voluntary agreements

Answer 35

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

Question 36

Education

Answer 36

Changes in consumer behaviour can be brought about by either direct education in schools or campaigns to raise awareness

Question 37

Free provision

Answer 37

Eg: rehabilitation facilities - minimise negative externalities
Free condoms and contraception to reduce pop growth and STDs

Question 38

Advertising

Answer 38

Eg: Reduce drink driving
Campaigns designed to change behaviour and reduce negative externalities

Question 39

Causes of govt failure

Answer 39

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

Question 40

Distortion of price signals

Answer 40

Subsidies for insulating homes - extra money attracts soem contractors who do not always finish job efficiently
Incentive did not work efficiently

Question 41

Unintended consequences

Answer 41

Hard to predict in advance
Eg: raising minimum wage - higher wages reduce business recruitment - more unemployment

Question 42

Excessive administrative costs

Answer 42

May be cheaper to pollute and pay fines than cleaning up production process