1.5 market failure & government intervention Flashcards
purposes of intervention
- reduce impact of external costs
- ensure under produced products are accessible to all
- ensuring over consumed products are discouraged or prevented
- reducing impact of anti competitive business behaviour
under consumption
when products that are socially desirable are too expensive to cover costs themselves
over consumption
occurs when social costs exceed private costs
methods of gov intervention
- regulation
- legislation
- indirect taxation
- grants & subsidies
- voluntary agreements
causes of gov failure
- distortion of price signals
- unintended consequences
- excessive administrative costs
- information gaps
free market economy
where markets allocate resources through the price mechanism
market failure
situation defined by an inefficient distribution of goods and services in the free market, occurs when social costs exceed benefits
command/planned economy
central governmental authority dictates levels of production that are permissible and prices that may be charged (most industries publicly owned)
mixed economy
features of both a command economy and a free market system
merit goods
people underestimate the benefits (positive externalities)
demerit goods
people underestimate costs (negative externalities)
private costs
paid for by individual or supplier when buying/supplying goods and services
private benefits
for the supplier these are the profits made and fulfilment of business objectives, for the consumer these are the satisfaction gained by consuming goods
externalities
when a third party is affected by the decisions and actions of others both positively and negatively
social costs
total costs of producing goods and services, calculated by adding private and external costs
social benefits
total benefit of producing goods and services, calculated by adding private and external benefits
