1.8 Market failure Flashcards
What is a demerit good
A good that is over-produced and or overconsumed where private benefits exceed social benefits if left of the free market
What is a merit good
A good that is under consumed and or under produced that has a greater social benefit then private benefit if left of the free market
What is a negative externality
Costs to a third party that are not included in the price of the economic activity
What is a positive externality
benefits to a third party that are not included in the price of the economic activity
What is an information failure
A lack of information leading to merit goods being under-produced and under-consumed while demerit goods are over-produced and over-consumed
What are the 2 characteristics of public goods
non excludable(available to everyone) and non rivalrous(no competition for the good)
What is a public good
A good that is produced by the government and open to everyone
What are monopolies
Firms that dominate the market as they are the only seller of the good allowing them to charge whatever price they would like
What is factor immobility
It causes unemployment and a loss of productive efficiency
What is equity issues
Markets can generate an unacceptable distribution of income and consequent social exclusion which the government may choose to change
What is the tragedy of the Commons
It occurs on common ground where everyone has the same access to the land and try to maximise their private benefits at the expense of society(resources eventually diminish)
draw a negative consumption externality
Draw a positive production externality
Draw a negative production externality
Draw a positive consumption externality
What is indirect taxation
A tax on a good or service(tax on spending) in order to reduce the consumption of demerit goods by rising prices
How does indirect taxation affect firms
Increases their cost of production causing them to raise prices
Advantages of indirect taxation
High tax revenues(inelastic PED)
Use of price mechanism(still consumer choice)
Internalises the externality by quantifying it (tax per unit=external cost per unit)
Disadvantages of indirect tax
May not significantly reduce demand if good is inelastic(addictive products such as alcohol)
Hard to quantify the externality/know the correct level of tax
Regressive taxation- more impactful on lower income households
Impacts global competitiveness for UK firms
Show the incidence of tax on an externality diagram
What is a subsidy
A payment made to producers to encourage the production of a good or service to increase the production of merit goods
Advantages of subsidies
Can increase consumption of merit goods
lower prices so more affordable for low income earners
Disadvantages of subsidies
Difficult to judge size of externality
Opportunity cost
Firms become reliant
Seen as artificial trade protection
If inelastic, may not increase consumption by that much
Draw the incidence of a subsidy on an elastic good
What is a minimum price
A floor price on a good or service that is over the market equilibrium to reduce consumption of demerit goods
Advantages of minimum price
Producers get a minimum guaranteed price
Encourage production of essential goods
Excess supplies can be stored
Disadvantages of minimum prices
Consumers may pay a higher price
Can encourage overproduction
Opportunity cost of Gov expenditure
Reduce international competitiveness
May encourage consumers to seek cheaper, more harmful alternatives
What are maximum prices
A ceiling price on a good or service to create excess demand and prevent the consumer from being exploited
Advantages of maximum prices
Allow less well of people to afford necessities
Lessen monopoly power to exploit consumers
Disadvantages of maximum prices
May create an excess of demand-people unable to access product/service
Excess demand= queues, shortages and waiting lists
Black markets may appear
What is state provision
Occurs when the government intervenes in the market in order to supply a good or service such as the NHS and public goods to ensure that an adequate amount of these products are available in the market
Advantages of state provision
Individuals do not have to worry about paying at point of consumption
Could improve equality
Can match government objectives
Disadvantages of state provision
Opportunity cost
Government may not have sufficient information
What is regulation
When the government attempts to create competitiveness in the market to protect the interests of consumers so that they are not exploited by firms
Advantages of regulation
Helps consumers make better decisions
Disadvantages of regulation
Interference from the ‘nanny state’
Suppliers may find way around the legislation
How does information failure lead to market failure
Consumers consume too much/little of a good due to a lack of information. By fixing it, consumers have more information to make more rational decisions and consume more merit goods and less demerit goods
Advantages of correcting information failure
Less costly solution
Targeted at specific individual/groups
Disadvantages of correcting information failure
Government does not always know best
No ideal solution
Example of correcting market failure
Food labelling(traffic light system)
What does extending property rights do
extending property rights may encourage greater valuing of the environment as a resource
What are the advantages of extending property rights
Property rights uses the market mechanism to ensure an efficient use of resources
There is an increase in knowledge and expertise for the organisation with the property right. It takes away pressure from the government to assess the pollution
There is a greater likelihood that the property resources will be managed carefully to ensure its availability for the future
The property owners can charge firms that need to pollute the environment
What are disadvantages of extending property rights
It is difficult for a government to extend property right
It could be difficult to trace the source of environmental damage
The legal costs involved in prosecuting a polluter could be extremely high which may deter victims from taking action
What are pollution permits
It is when the government gives firms a legal right to pollute a certain amount e.g. 100 units of Carbon Dioxide per year. The aim of them is to provide market incentives for firms to reduce pollution and reduce the external costs associated with it.
