1.8 The market mechanism, market failure and government intervention in markets

Question 1

rationing

Answer 1

increasing prices rations demand

Question 2

signalling

Answer 2

prices provide important information

Question 3

incentive

Answer 3

make market participants change their actions

Question 4

allocative

Answer 4

divert resources where returns can be maximised

Question 5

market failure

Answer 5

miss allocation of resources in an economy

Question 6

complete market failure

Answer 6

free market fails to make a market for a good or service (missing market)

Question 7

partial market failure

Answer 7

when a market exists but doesn’t maximise economic welfare

Question 8

public good

Answer 8

non excludable, non rivalrous

Question 9

private good

Answer 9

rival and excludable in consumption

Question 10

quasi-public good

Answer 10

public at low demand, private at high demand e.g. roads

Question 11

externality

Answer 11

effect on third parties

Question 12

private cost/benefit

Answer 12

cost/benefit to the producer

Question 13

public cost/benefit

Answer 13

private cost/benefit plus externality

Question 14

positive externality

Answer 14

a positive effect on third parties in production or consumption

Question 15

negative externality

Answer 15

a negative effect on third parties in production or consumption

Question 16

environmental market failure

Answer 16

negative externalities from over using resources

Question 17

property rights

Answer 17

legal rights to use resources

Question 18

tragedy of the commons

Answer 18

exploitation of of resources that aren’t owned

Question 19

merit good

Answer 19

under-consumed in free market

Question 20

demerit good

Answer 20

over consumed in free market

Question 21

information failure

Answer 21

market participants don’t have enough information to make effective judgements of levels of consumption/production

Question 22

occupational immobility

Answer 22

workers find it difficult to move between jobs

Question 23

geographical immobility

Answer 23

workers have difficulty moving to more expensive areas with jobs

Question 24

inequitable distribution of income and wealth

Answer 24

the way in which wealth and income is distributed is considered unfair

Question 25

indirect tax

Answer 25

tax on spending

Question 26

subsidy

Answer 26

payment to producers to encourage increased production

Question 27

minimum price

Answer 27

a price floor placed above equilibrium price

Question 28

maximum price

Answer 28

a price ceiling placed below equilibrium price

Question 29

regulation

Answer 29

rules/laws used to restrict freedom and actions to reduce market failure

Question 30

pollution permit

Answer 30

the right to use economic resources to a certain degree

Question 31

competition policy

Answer 31

government policy to make markets more competitive

Question 32

merger

Answer 32

two or more firms willingly join together

Question 33

takeover

Answer 33

when two or more forms unwillingly join together

Question 34

public ownership

Answer 34

government ownership of firms/industries

Question 35

nationalisation

Answer 35

transfer of assets from private to public sector

Question 36

privatisation

Answer 36

sale of government owned assets to the private sector

Question 37

regulatory capture

Answer 37

when regulatory bodies are unduly influenced by the businesses they are regulating

Question 38

deregulation

Answer 38

removal of rules and regulation to increase efficiency

Question 39

government failure

Answer 39

when government intervention reduces welfare